Equity market pricing in slower GDP
growth, slower interest rate cuts and
weaker domestic currency expectations
􀀗 However, we believe the Turkish macro
backdrop is still supportive and that
Turkish banks are oversold
􀀗 Upgrading Akbank, Isbank and Garanti to
Overweight (V) and YKB to Overweight,
maintaining Overweight (V) on TEB and
Vakif, downgrading Bank Asya to Neutral
Overdone
Turkish equities have recently decoupled from interest rates.
Index and yield levels imply either an additional 200bps on the
cost of equity or 15% off earnings for Turkish companies. If the
cost of equity (CoE) is the same, this means the market is
pricing in a mix of slower GDP growth, slower interest rate cuts
and weaker domestic currency expectations. We believe,
however, that the carry trade, with a real 8% yield differential
between TRY and USD, should support the Turkish lira and
that it is too early to be pessimistic about growth. However,
while the possibility of interest rates remaining at current levels
could mean lower volumes and lower earnings for Turkish
companies, with their high capitalisation levels, the banks
should enjoy higher returns on free funding.
Having underperformed the MSCI EMEA index by 18% ytd,
we believe Turkish banks are highly attractive. We are
upgrading YKB to Overweight from Underweight, with a
target price of TRY4.16, and maintaining our rating on
Vakif at Overweight (V), with a TRY4.56 target. These are
our two highest conviction calls in the sector. The three
major banks, Akbank, Garanti and Isbank, have all been sold
as a proxy for the Turkish market in recent market turmoil.
Now, given their attractive valuations, we are upgrading
them all to Overweight (V), with target prices of TRY9.70,
TRY11.00 and TRY8.15, respectively. Among the small
caps, we still favour TEB as one of the rapid growth stories
and maintain our Overweight (V) rating on the stock, with a
target price of TRY3.32. However, we are downgrading our
rating on our previous top pick, Bank Asya, to Neutral, with
a target price of TRY13.80.