Turkish Market Outlook
Equity Research Team
Market in this month
March 2014
EM rally combined with the expectation of potential victory of AKP in the local elections boosted the market in the second half of the month and BIST-100 increased by 10% in March. Interest rate on benchmark bond declined from 11.07% at the end of February to 10.79% at the end of March. TL appreciated against basket (50/50 €/$) by 2% in March relative to February-end. Developments on Turkish Politics On March 3rd, NTV reported that after the release of new bill on High Council of Judges and Prosecutors (HSYK) on the Official Gazette the Government reshuffled 238 administrative personnel out of 270, again within HSYK. On March 5th, NTV reported that investigation requests for the four ministers, whose names were mentioned in the December 17 corruption investigation, have been sent to the Parliament by prosecutors. PM Erdogan commented on several issues to local journalists. The highlights of his remarks are; 1) PM Erdogan strictly denied corruption allegations again, 2) Presidential candidacy is not in his agenda and current president could continue in the office, 3) He personally does not want to alter the party’s three-term rule, but if AKP officials request, they might consider altering it, 4) About a possible operation against Gulen movement, PM Erdogan hinted that after the local elections (on March 30) the Government will take necessary measures within the judicial framework. PM Erdogan also signaled that it will be a comprehensive operation including the movement’s activities related to donations, banking, exams, espionage, blackmailing, bribing. On March 7th, PM re-signalled that there will be aggressive/comprehensive operation against Gulen movement after the local elections. AHaber and NTV reported that additional measures might also be introduced including shutting down Youtube and Facebook. Also the Government might request an Interpol red notice to seek Mr. Gulen’s extradition. PM Erdogan added that national security is under threat and judicial system & TUBITAK need to be restored to overcome this problem. PM Erdogan also commented on leaked video tapes and stressed that majority of them are fake. PM's office plans the presidential elections on the following dates: Aug 10 th for the 1st and Aug 24th for the 2nd round. Current President Gul's term ends on Aug 28th. The final decision on the date will be given by the High Electoral Board. Candidates must be approved by the Board exactly one month before the 1 st round (i.e. July 10th in this case). This means that the nominations of the candidates by the political parties should be done around mid-June-to-early July. So far, apart from Erdogan and/or Gul, no other names were mentioned by the political parties yet. For the first time in Turkish history, Turkish people will elect the president. Candidates require 50% + 1 vote to win the presidential elections. On March 9th, Istanbul court ordered the release of 19 men convicted in the controversial Ergenekon case, which supposedly was an illegal/military organization to overthrow the Government. Travel ban has been introduced for the released people, since the release does not mean a full pardon and court case practically continues. On March 12th, CHP called for an emergency meeting at the Parliament on March 18 in order to let the Parliament hear about the details of the investigation requests of prosecutors regarding the corruption charges against four ministers. Other opposition parties MHP and BDP announced that they will support the meeting request. Usually parliament is in election recess until early April. On March 13th, EU expressed deep concern at recent allegations of high-level corruption in its 2013 progress report on Turkey. The report views the recent judiciary and internet laws as restricting fundamental freedoms, take Turkey away from meeting the Copenhagen criteria for EU accession. The European Parliament called for tolerance from the Turkish government and asked providing freedom of religion and belief and freedom of assembly for all. On March 14th ; 1) The Parliament rejected the discussion request on the investigation inquiry of prosecutors on four ministers 2) PM Erdogan reiterated the possibility of external forces intervening in Turkish politics. On March 21st, Turkey blocks access to Twitter based on a local court order after PM Erdogan vowed to shut down Twitter based on local court order in his campaign rally at Bursa yesterday. PM Erdogan stated that he is not afraid of potential pressure from international community and wants everyone to witness the power Turkish Republic. On March 23rd, Turkey’s armed forces shot down a Syrian plane on Sunday, after it crossed into Turkish airspace. PM Erdogan told in a rally in Istanbul that Turkey’s slap after this will be hard if Syria continues to violate its airspace. Syrian TV and Government reported that the plane was shot down by Turkey as it pursued rebels within Syrian territory. Syrian Government called the move as “flagrant aggression”. On March 24th, Reuters reported that Turkish businessmen, opposition parties, EU, Germany, US, UK and other officials expressed concerns regarding Turkey’s twitter ban.
1/5
Turkish Market Outlook Market in this month
Equity Research Team March 2014
On March 26th, Bloomberg and Reuters reported that a court in Ankara decided on suspending the implementation of twitter ban. The Telecommunication Authority has 30 days to implement the rule and has also the right to appeal. Meanwhile, Twitter has filed petitions in Turkish courts to challenge ban on its service. On March 27th, Turkey blocked YouTube due to a leak of tape of Turkish officials on Syria security. Foreign Minister Davutoglu said that the posting on YouTube of a recording of top officials discussing possible military operations in Syria constituted a declaration of war against Turkey. Government officials called the leakage as a cyber attack against Turkish Republic and stated that other social media platforms could be blocked if national security is threatened. Developments on Macro Side On March 3rd, February inflation figures were announced. Monthly consumer price inflation came in at +0.43% in February compared to market consensus of +0.4%. With the February inflation figures, annual CPI inflation increased from 7.75% in January to 7.89% in February. On the other hand, annual PPI inflation jumped from 10.7% to 12.4%. On March 4th, CBT released the monthly data for the net short FX position of non-financial Turkish companies. According to the official data, as of end-December 2013 net short FX position of non-financial Turkish companies reached US$174 bn, which was US$170 bn in end-November 2013. It is actually weird to see that net short FX position of companies continued to grow despite the sizeable TL depreciation and continuous FX purchases of residents. Meanwhile, it is worth noting that one should not forget the fact that this short FX position will not be covered in the next 12 months. The short-term part of this FX position is still only US$18 bn, which is not a scary amount. However, we should also note that this amount is also not improving. On March 6th, S&P listed Turkey among the most fragile three countries along with Ukraine and Ghana. According to S&P, political situation is tense in emerging markets and FED’s tapering makes life difficult for them. However, the agency told that current market conditions and their impact on the economic outlook should not lead to widespread sovereign rating actions. S&P maintained ratings but lowered stand-alone credit profiles (SACP) of five Turkish banks. BRSA announced the banking sector’s net income as of January 2014 as TL1.4bn, down 44% y/y as expected. This indicates to a 1% m/m rise in the bottom-line while the January figure compares 14% lower vs. the monthly average of 4Q13. Recall that the CBT has sharply raised interest rates by end-January which suggests that the likely improvement in spreads in January will take a hit in the coming months. On March 11th, January industrial production figure was announced. Industrial production registered a 7.2% y-o-y increase in January against the consensus expectation of 4.4%, after posting a 6.9% y-o-y increase in December. It is worth noting that calendar day and seasonally adjusted data suggest that IP in January posted a +1.1% m-o-m increase. On March 12th, January current account balance figures were announced. Current account balance in January recorded a deficit of US$4.9 bn, which was slightly better than the market consensus of US$5.0 bn. On a 12-month rolling basis, the deficit improved from US$64.9 bn to US$64.0 bn. The improvement came mainly from smaller foreign trade deficit. On March 17th, Finance Ministry released the February Central Government budget figures. The strong budget performance of 2013 appears to have continued in the first two months of the year. In February 2014, budget surplus was TL1.67 bn compared to the budget deficit of TL1.45 bn in February 2013. In addition, primary surplus was TL5.0 bn, which was TL3.5 bn in the same period of last year. The CBT held its monthly MPC meeting and did not touch anything as expected ahead of local elections. In MPC meeting summary, we see two minor changes: 1) INFLATION: Compared to the last meeting, the Bank appears to be more concrete and cautious on the inflation front. 2) GROWTH& C/A DEFICIT: Domestic demand is slowing down according to CBT and thanks to the contribution of net exports C/A deficit could improve noticeably this year. Moody's announced that it is reviewing the ratings of 10 Turkish banks for downgrade citing the challenges in the operating environment due to 1) material slowdown in the GDP; 2) increased funding costs; 3) uncertainty due to recent political developments. If Moody’s decide to downgrade the ratings of Turkish banks to subinvestment grade, it would increase the funding costs and availability of funding sources as banks have been increasingly using Eurobonds as a funding source over the past two years. On March 24th, Rating agency Fitch told that Turkish corporates are the most exposed among EMEA emerging markets to a scenario of slowing growth, rising interest rates and a persistently weak local currency, according to a Fitch emerging-market FX stress analysis.
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Turkish Market Outlook
Equity Research Team March 2014
Market in this month
On March 25th, Capacity utilization rate (CUR) for March was announced. CUR was 73.1% in March 2014 against 72.7% in March 2013 and 73.3% in February 2014. The seasonally adjusted CUR in March declined further to 74.3% reaching its lowest level in the last 12 months. It is worth highlighting that we did not observe a broad deterioration in CUR. Rating agency Moody’s stated that political turmoil and related volatility in financial markets increase Turkey’s external vulnerability. The agency also added that some of possible shocks to economy might be alleviated by Turkey’s sound fiscal policy and relatively low level of external debt to GDP. On March 27th, S&P stated that they expects the CBT’s rate hikes in January to pressure margins, especially in 1H14, which, coupled with higher CoR and slower lending, is forecast to eat into earnings in 2014. Nevertheless, S&P thinks that Turkish banks have adequate provisioning and capital buffers to withstand expected asset quality pressures, but remains cautious about the elevated funding risks for banks, notably in relation to foreign debt. The rating agency notes that investor’s increasing risk aversion toward emerging markets may take its toll on the rollover ratios and pricing of foreign debt maturing this year. Note that S&P had already reduced the rating outlooks of banks to negative from neutral back in early February, in line with the sovereign outlook change, and lowered the stand-alone credit profiles in early March.
Outlook about market Local elections were held on March 31st. Preliminary results show that Justice and Development Party (AKP) won a victory by receiving c.46% of votes at nationwide municipal election. It is higher than the 38.4% AKP received in the 2009 local election, but lower than 49.8% that AKP obtained in 2011 general election. Despite corruption allegations against AKP and harsh criticism over AKP’s governing capacity, the AKP preserved its power. The AKP won Istanbul and Ankara municipalities, similar to the 2009 election. Comparable breakdown of votes at latest elections in Turkey
Turkey (general)
Current Local Election (2014)
Former Local Election (2009)
Latest General Election (2011) BDP Other 6,6% 4,7%
Other 5,1%
BDP 6,0% MHP 15,3% CHP 28,0%
AKP 45,6%
BDP 5,7% MHP 16,1%
Other 16,7%
CHP 23,1%
AKP 38,4%
MHP 12,9%
AKP 49,9% CHP 25,9%
Although the main opposition party CHP received 28.6% of votes, better than the 2009 local election result of 23.1% and the 2011 general election result of 26% and once again having won Izmir municipality, it was a disappointing result for CHP since it did not materially change its votes. Similarly, the other main opposition party, the nationalist MHP, received 15.3% of votes. Their result was 16% in the 2009 local election and 13% in the 2011 general election. According to Ak Investment’s election model, if parties preserve the votes they received at yesterday’s election, the AKP would get 301 seats in the Parliament, lower than the 327 obtained in the 2011 general election. CHP and MHP would obtain 151 and 68 seats at the Parliament. AKP’s votes would be higher than the absolute majority of 276, but significantly lower than 330 seats needed to change the constitution. The election victory should come as a big relief to the AKP and PM Erdogan given the increased polarization in the country and the significant headwinds created by the corruption probe and the release of audio and video tapes. As the risk of political fragmentation seems to have been evaded, the results are also well-received by the financial markets.
3/5
Turkish Market Outlook
Equity Research Team March 2014
Outlook about market
Local election results are market-friendly in the short-term, although it would not terminate political unrest in Turkey. The AKP would try to preserve its voting power for the general elections while the opposition parties will continue to criticize AKP over corruption allegations. Polarization and tension are likely to prevail until the general elections are held. The results of local elections imply ; 1) PM Erdogan might run for presidency in August 2014, since AKP votes are still higher than CHP+MHP votes, 2) President Gul might still run for presidency depending on PM Erdogan’s decision on presidential elections 3) Fight between PM Erdogan and Gulen movement will continue, as signaled by PM Erdogan 4) Concerns on political stability will fade at least for now, but political tension could remain high ahead of presidential elections 5) Likelihood of general elections brought forward increased substantially, since AKP might prefer to reap the benefits of local elections results 6) Single party government is not at risk meaning that any opposition within AKP against Erdogan will be very limited 7) The future of corruption charges is still unknown. The current local election outcome amid fight between PM Erdogan and Gulen movement and FED’s tapering hints that politically it might be correct to bring forward general election (probably combining it with presidential election) (Scheduled date for general election is June 2015). If general elections are brought forward, Turkey gets rid of political uncertainties quicker. In his post-election speech, PM Erdogan clearly expressed his determination to tackle the “Gulen Movement” and signaled that the government will soon launch a large scale investigation. This suggests that the domestic political scene may remain tense/noisy going forward. The exact course of ongoing corruption probes against the AKP will continue to create an additional source of uncertainty. In terms of valuation, we think that the market is not attractive, considering that BIST-100 trading at 2014E P/E multiple of 10.8x, which is higher than the last 5-yr average forward P/E multiple of 9.6x. Although the analysts are revising down their earnings forecasts for 2014, we think that current consensus forecast of 0% earnings growth for BIST-100 still seems optimistic. Our base case scenario implies 6% contraction in earnings, corresponding to 2014E P/E of 11.7x. Turkish bonds offer the highest nominal interest rate in the World after Brazil and therefore carry trade might continue for a while, which guarantees portfolio inflows into the country and therefore might justify current high P/E levels in the market at a certain extent. The market expects 20% earnings growth for 2015, corresponding to 2015E P/E multiple of 9.1x, which is more attractive relative to 2014E P/E multiple and implies 6% discount relative to last 5-yr average forward P/E multiple of 9.6x. However, we believe that it is too early to buy into 2015 expectation as the road to presidential and general elections will be quite bumpy. 2014 Expectations Banks EPS Growth P/E P/B XU100 Non-Financials EPS Growth P/E XU100 EPS Growth P/E
Bloomberg Consensus
Best Case
Our Scenarios Base Case
-13% 9.3 1.04
-5% 8.3 1.05
-17% 9.6 1.07
-50% 15.8 1.12
11% 11.8
15% 11.6
2% 12.9
-10% 14.7
0% 10.8
7% 10.3
-6% 11.7
-26% 15.0
Worst Case
P/E XU100 XBANK XUSIN MSCI EM ALL MSCI EM BANKS MSCI EM INDUSTRIALS
2014E 10.8 9.3 12.8 10.9 8.3 15.5
2015E 9.1 7.3 11.2 9.8 7.3 12.7
P/B XBANK MSCI EM BANKS
2014E 1.09 1.14
2015E 0.97 1.03
4/5
Turkish Market Outlook
Equity Research Team March 2014
Ak Asset Management Göktürk IŞIKPINAR
CIO of Equities
[email protected]
Ebru DURUSOY
Head of Research Team
[email protected]
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