Turkey Stocks Worst-Performing in World Offer Value, Hermes Says

Hermes Fund Managers Ltd. sees value in Turkey’s stock market, the world’s worst-performing in dollar terms, as Prime Minister Recep Tayyip Erdogan’s government grapples with graft allegations.

“Bargains cannot be found in a euphoric market -- they’re in worried markets,” Gary Greenberg, who oversees about $785 million in emerging-market stocks at Hermes, said in a phone interview from London Feb. 26. “Turkey qualifies as a worried market right now.”

Greenberg raised Turkey to overweight last month, saying the market was “looking cheap,” as the lira’s 19 percent slump over the past 12 months re-established export competitiveness. A measure widely used for valuing stocks fell to its lowest since 2009 as a bribery scandal in December embroiled Erdogan and led to the resignation of four ministers, including the former Economy Minister Zafer Caglayan. The Borsa Istanbul 100 index has lost 37 percent in the past year, with returns calculated in dollar terms, out of 94 primary indexes tracked by Bloomberg.

Three Turkish stocks that account for about 7.5 percent of the nation’s benchmark equity gauge make up nearly 2.7 percent of the $350 million Hermes Global Emerging Markets Fund (HMGEFGA), Greenberg said. The fund rose 7.9 percent last year and fell 6.9 percent in January, data provided by Hermes show. That compares with a 5 percent decline in the MSCI Emerging Markets Index in 2013 and a 6.6 percent drop in the first calendar month.

Graft Probe

One of Greenberg’s picks is state-run Turkiye Halk Bankasi AS (HALKB), which trades at a price-to-book value of 1.1, the lowest since 2009, according to data compiled by Bloomberg. The shares of Halkbank, whose chief executive officer Suleyman Aslan was arrested as part of Turkey’s graft probe and was replaced on Feb. 7, have fallen 9.5 percent this year.

“Some stocks have gotten pretty cheap, particularly Halkbank,” Greenberg said.

Foreign investors sold a net $472 million worth of Turkish stocks since the end of May, according to central bank data to the week ended Feb. 21. The benchmark index’s average price-to-book multiple declined to 1.26, the lowest since 2009.

Turkey’s assets have been hit since May last year as the former chairman of U.S. Federal Reserve Ben S. Bernanke first mentioned the possibility of tapering its record monetary stimulus. The Fed started trimming in December its monthly debt purchase that boosted higher-yielding assets globally.

Turkish exports to the European Union climbed 6.1 percent to $63 billion last year, reversing a 5.1 percent slide in 2012. The share of EU in exports rose to 41.5 percent in 2013, from 39 percent in the previous year, data from the statistics office in Ankara show.

European Recovery

Greenberg’s fund is also invested in Arcelik AS (ARCLK), Turkey’s largest home-appliances maker, and Aygaz AS (AYGAZ), the nation’s biggest seller of liquefied petroleum gas. While Arcelik has lost 2.1 percent this year, Aygaz fell 3.2 percent over the same period.

Arcelik is “in part a play on European recovery,” Greenberg said. Western Europe accounts for 31 percent of the company’s sales, according to a company presentation made for 2013 results. Transforming into a “more diversified gas distribution and power generating company,‘‘ Aygaz is a longer-term idea in the portfolio, he said.

Turkey’s graft probe took a new turn after the Feb. 24 publication online of a tape in which Erdogan allegedly discussed disposing of funds with his son. The prime minister responded by saying the recording was fake, accusing U.S.-based cleric Fethullah Gulen of attempting to overthrow him before local elections on March 30.

Stocks Gain

The benchmark index in Turkey slid 2.2 percent yesterday as Ukraine’s political crisis worsened, following last month’s bloody uprising that led to the ouster of Viktor Yanukovych as president. The gauge climbed 2.4 percent at 2:38 p.m. today as Russian President Vladimir Putin stepped back from escalating the crisis in the Crimea region, ordering an end to military exercises on schedule.

‘‘I’m not counting that this will be a year where capital flows return,” Greenberg said. “But, over the next two to three years,” select emerging markets will see them come back, he said.

To contact the reporter on this story: Taylan Bilgic in Istanbul at tbilgic2@bloomberg.net

To contact the editor responsible for this story: Samuel Potter at spotter33@bloomberg.net

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