Turkey Stocks Rally Not Over on Lower Valuations, BofA Says

Turkish shares, the world’s top performers in 2012, will keep rallying this year as investors are attracted by the nation’s new investment-grade rating and relatively low valuation, Bank of America Merrill Lynch said.

Turkiye Garanti Bankasi A.S., Turkey’s largest lender by market value, and Emlak Konut Gayrimenkul Yatirim Ortakligi AS, the country’s biggest real estate developer, are among BofA’s top Turkish picks for 2013, analysts including Ali Yavuz Birdal said in an e-mailed note today.

The nation’s ISE National 100 Index trades at 10.9 times next year’s earnings, compared with a price-to-earnings ratio of 12.1 for Poland’s WIG20 Index, 11.5 for Brazil’s Bovespa Index and 11 for the MSCI Emerging Markets Index. Fitch Ratings Ltd. cited the sound banking system and lower government debt as reasons behind its November decision to raise Turkey to investment grade.

“This equity story is not over as Turkey is not expensive and it has lagged all other major EM markets in the 18 months before respective moves to investment grade,” the analysts said.

Turkey’s economic growth will accelerate to 4 percent this year from 3 percent in 2012 on a pick up in domestic demand, BofA said, matching the median growth forecast of 22 analysts compiled by Bloomberg. That’s more than three times average growth for developed nations, the data show.

“Turkish growth is a key driver of the story in a still growth-starved world,” according to the note.

The upgrade helped Turkish stocks and bonds post the biggest rally among emerging markets last year. The ISE 100 Index soared 53 percent in 2012, the most among 93 global indexes tracked by Bloomberg. That compares with an advance of 15 percent by the MSCI Emerging Markets Index. Shares in the country had dropped 22 percent in 2011, underperforming the 20 percent retreat in the emerging markets gauge.

Banks, Property

The ISE 100 Index rose 0.8 percent to 80,224.41, the highest since at least 1988, when Bloomberg started tracking the shares, at the close in Istanbul.

BofA recommends investors buy Turkish banks and companies that would benefit from economic growth and interest rates. Real estate shares may also “break out once we get tax clarity,” the analysts said. The government raised value-added taxes on new homes on Jan. 2, sending the index tracking real estate investment trusts down 2 percent this month.

Financial companies are likely to post 22 percent expansion in earnings per share this year, compared with 6 percent for peers in global emerging markets, BofA said. Garanti, whose shares rallied 57 percent in 2012, is set to deliver the strongest margin expansion this year as it has the greatest focus on retail, it said. The bank’s 2013 profit may grow 10 percent, according to the average estimate of 25 analysts compiled by Bloomberg.

Among BofA’s other top picks are Bizim Toptan Satis Magazalari AS, Trakya Cam Sanayii AS, Ford Otomotiv Sanayi AS, Turkcell Iletisim Hizmetleri AS and Turkish Airlines.

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