Photographer: Staton R. Winter/Bloomberg

Once Spurned Turkey Stocks Find Love as Political Risk Ebbs

  • Turkey discount to emerging-market peers at widest since 2009
  • Sell signals on Turkish stocks fall to two from 57 in April

With the Federal Reserve sticking to cheap money policies alongside a lull in Turkey’s fractious politics, equity investors are boosting bets one of their least-loved emerging markets is poised for a turnaround.

The number of companies in the Borsa Istanbul 100 Index giving sell signals based on moving averages has fallen to just two, from 57 at the end of April. That may herald further momentum for the gauge’s 7.5 percent rally this month. Turkish stocks still trade near their deepest discount to emerging-market peers since 2009.

The improved sentiment reflects wagers the Fed will hold off raising U.S. interest rates after Britain’s vote to leave the European Union clouded the global economic outlook, boosting the appeal of emerging-market assets. At the same time, Turkey’s volatile domestic political scene has stabilized since a new prime minister took over in May and the government has taken steps to resolve diplomatic rows with Russia and Israel.

"We’re prepared to take the risk," said Tim Love, a London-based investment director of emerging-market equities at GAM U.K. Ltd., who has an overweight position on Turkey and added to his holdings in the global sell off that followed Brexit in late June. The country’s steps to ease geopolitical tensions "may soon start bearing fruit and people should start taking Turkey risk given its attractive yield advantage," he said.

Market Rally

Turkey’s benchmark equity index has rallied about 9 percent over the past month, pushing up the average valuation for stocks traded in Istanbul to 8.7 times projected 12-month earnings, compared with a multiple of 12.3 for the global developing-countries benchmark. The gauge rose 1.6 percent in Istanbul on Thursday, gaining for a fourth day in the longest rally since March 21.

The Turkish index’s Moving Average Convergence-Divergence measure , known as the MACD and used to gauge changes in an asset’s direction or trend, shows buy indicators on stocks have jumped to 28 from zero since May.

“Turkey offers an upside, even out-performance based on its attractive valuations provided that the global risk appetite is on," said Tony Hann, the London-based head of equities at Blackfriars Asset Management Ltd., which oversees about $270 million. Still, the political situation remains "too unstable to warrant a long-term view," he said.

Political Row

Recep Tayyip Erdogan.
Recep Tayyip Erdogan.
Source: Anadolu Agency via Getty Images

A spat this year between Turkey’s two most senior politicians that culminated in the prime minister’s resignation sent a four-month equity rally into reverse, with the Istanbul index declining 8.8 percent in May. The current rebound, helped by President Recep Tayyip Erdogan’s efforts to patch up relations with Russia, which had turned frosty after Turkey shot down one of its war planes last year, may also evaporate if politics take a renewed turn for the worse.

"Turkey’s steps to ameliorate its foreign relations, especially with Russia, have sparked some optimism that this might cascade down into domestic politics," said Murat Gulkan, a money manager at Istanbul-based Unlu Portfoy Yonetimi AS. "That said, Turkey is Turkey, and mending fences at home is no simple task. So it is not easy to say how long this favorable mood will continue.”

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