Turkey’s stock market underperforms in risk-on rally
Governance may be catching up with valuation in one of this year’s best performing markets
Turkey’s main indices fell 1.3% despite a strong rally in Europe and Asia, the second day of declines of more than 1%.
One of the world’s best-performing markets year to date, Turkey rose in dollar terms by 50% as of the Aug 14 peak. Governance appears to be catching up with valuation: although the Turkish market is cheap at 9X forward earnings, rapid credit growth, high inflation and a large current account deficit cloud the outlook.
Citibank economists wrote recently:
Portfolio inflows (net) strengthened reaching US$17.4bn vs. US$8.4bn in the same period of 2016…Although there has been a significant rise in portfolio inflows, the overall financing picture is yet to display a meaningful improvement. This, coupled with resident’s behavior in the FX market, the uncertainty embedded in the current monetary policy framework and Turkey’s disappointing inflation performance, is holding back the lira, in our view. Our empirical findings suggest that these factors indeed account for a significant portion of the underperformance of the lira…The noted backdrop, in turn, leaves little room for policy slippages and renders Turkish assets vulnerable to sudden shifts in investor sentiment.