Buy Turkey Stocks on Valuation Near Cheapest Ever, Citi Says

Investors should buy Turkish equities as the country’s share index underperformed its peers this year and relative valuations look nearly as cheap as ever, Citigroup Inc. said.

Turkey “has underperformed with emerging markets and valuations are looking nearly as cheap as they ever have,” Citigroup analysts Andrew Howell and Maria Gratsova in London said in an e-mailed report today. Investors have “reduced their exposure significantly over the past year. We say buy it back.”

The Turkish market’s underperformance over the past year has been partly due to the country’s currency weakening 13 percent over the course of the year, the analysts said, pushing Turkish equities to their second-worst drop relative to the rest of emerging markets in the past decade.

The underperformance nearly equals that of the “mini-panic of 2006,” during which the lira was also weak and which was followed by a “powerful two-year Turkish rally,” the analysts said.

The stocks on Turkey’s ISE National 100 Index (XU100) have lost more than a quarter of their value this year, falling 27 percent in dollar terms. The index rose 195.18, or 0.4 percent, to 55,433.40 at 10:55 a.m. today, gaining for a third day.

Citigroup said its “top picks” in Turkey were automaker Tofas Turk Otomobil Fabrikasi AS (TOASO), wholesale supermarket chain Bizim Toptan Satis Magazalari AS, airport operator TAV Havalimanlari Holding AS (TAVHL), builder Tekfen Holding AS, and banks Turkiye Garanti Bankasi AS (GARAN) and Yapi & Kredi Bankasi AS.

‘Not Risk-Free’

The “buy” recommendation for Turkish stocks is “certainly not a risk-free” call, the analysts said, with Turkey’s record current-account deficit being “the most persuasive reason to avoid Turkish assets right now.”

The current-account gap, which reached a $72.5 billion deficit in the 12 months through June, puts Turkey at a greater risk of a slowdown in capital inflows and could lead to a “disorderly further weakening of the lira,” the report said.

The resilience of Turkish bond markets, however, shows there’s “no signs of capital flight” from Turkey, Citigroup said. Turkish bonds strengthened over the past month, with yields falling 11 basis points to 7.86 percent over the period.

“Taking all this into account, we still see Turkey as ‘the place to be’” in emerging markets with Turkey offering “some of the more attractive valuations we have seen in years,” the analysts said.

To contact the reporter on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net

To contact the editor responsible for this story: Mark Bentley at mbentley3@bloomberg.net

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