Turkey Stocks Downgraded at BofAML on ‘Stretched’ Valuations

Bank of America Merrill Lynch cut Turkish equities to the equivalent of neutral from overweight, citing expensive valuations.

Turkey’s benchmark gauge has jumped 14 percent since local elections on March 30, outperforming the MSCI Emerging Markets Index by 7.7 percentage points. It traded at 10.9 times projected 12-month earnings on June 10, the highest level in more than a year, according to data compiled by Bloomberg. The price-to-earnings multiple was at 10.4 today compared with 11 for the developing-nations measure.

Valuations are “stretched,” BofAML analysts including Ajay Singh Kapur said in an e-mailed report today, downgrading Turkish shares to medium weight. When the multiple has traded at or above peers on a 12-month forward basis, “Turkey has underperformed EM 80 percent of the time in the next year by a median 20 percent,” BofAML analysts including Turker Hamzaoglu and Ali Birdal, said in a separate report e-mailed today.

The Borsa Istanbul 100 Index rose 0.6 percent by 4:17 p.m. local. It dropped 2.7 percent in the previous two days as violence escalated in Iraq, with Islamist militants moving toward the oil-rich nation’s capital, Baghdad.

West Texas Intermediate crude fell today amid speculation that last week’s increase to the strongest level in nine months was excessive.

Vulnerability to Oil

Turkey is vulnerable to higher energy prices and increased geopolitical tension in the region, with Iraq being its second-biggest market for overseas shipments, according to BofAML. “Every 10 percent decline in exports to Iraq and every $10 increase in oil prices could add 0.2 percentage point and 0.5 percentage point to Turkey’s current-account deficit,” Hamzaoglu and Birdal said.

Last month, Turkish Prime Minister Recep Tayyip Erdogan was reported to have criticized the central bank’s interest-rate policy as a 0.5 percent cut in the benchmark repurchase rate to 9.5 percent in May was deemed inadequate.

Concerns such as the Turkish central bank’s independence and the presidential elections in August also “give good reason to view this market with greater caution,” the analysts said.

Stocks that BofAML still prefers in the Turkish market include Turkiye Garanti Bankasi AS because of its relatively-strong capital ratios, which combined with greater internal capital generation could fund growth, market share gains, or return of cash to shareholders, according to the report. It also likes Akbank TAS, Arcelik AS and Haci Omer Sabanci Holding AS.

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