Turkey Stocks Ripe for Rally With Discount to Peers at 2009 High

  • Delay in Fed rate increase may spark inflow, Renaissance Says
  • Valuation of Turkish stocks fell in May amid political turmoil

Cheap Turkish Stocks May Be Ripe for a Rally

Turkish stocks haven’t been so cheap relative to their peers in more than six years.

The difference between the future price-to-earnings ratio of Turkey’s main equity gauge and that of the MSCI Emerging Markets Index rose to the widest since December 2009. Turkish stocks last month dropped the most in more than two years after political tension spurred by President Recep Tayyip Erdogan’s bid to consolidate power prompted the prime minister to resign and led to a cabinet reshuffle.

Now that Federal Reserve Chair Janet Yellen has damped expectations of a U.S. interest-rate increase next month, Turkish stocks will probably outperform their peers in the initial phases of a rally, said Michael Harris, the head of research at Renaissance Capital Ltd. in London. Turkey’s assets are vulnerable to U.S. monetary policy decisions because the nation relies on foreign inflows to help fund its current-account deficit.

Without the selloff last month, “the case for Turkey to outperform wouldn’t be as strong,” Harris said.

The Borsa Istanbul 100 Index lost $24 billion in May as foreigners dumped $701 million worth of equities, the most since November. The price-to-earnings ratio over a 12-month period for Turkish equities fell to as low as 8.1 last month before rising to 8.3 as of 12:18 p.m. in Istanbul Thursday. With the ratio for emerging-market stocks at 12.2, the difference was 3.9 multiples.

A dovish Fed “allows yield chasing investors to turn a blind eye to Turkey’s well-known vulnerabilities,” Citigroup Inc. analysts including Richard Schellbach and Andrew Howell said in an e-mailed report this week.

Before it's here, it's on the Bloomberg Terminal.