Traders Are Turning to 2017's Worst Stocks in Search of Big Returns

Updated on
  • Investors poured $90 million into a U.S.-Russia ETF in Sept.
  • Turkish stocks are struggling to keep pace after rally

Emerging-market investors who made Turkey one of the best equity bets this year are turning their attention back to Russia barely two months after the U.S. tightened sanctions on the world’s biggest energy exporter.

Turkish equities were among the world’s top five performers until this month as a surge in state-backed lending, faster-than-expected economic growth, currency stability and tempting valuations fueled a 40 percent rally through the end of August. Russia, meanwhile, languished near the bottom of the pile as the harsher U.S. penalties and oil-price uncertainty curbed appetite.

An almost 10 percent jump in crude since late August is prompting investors from Union Investment Privatfonds GmbH to Investec Bank Plc to look again at Russian stocks, where valuations are the lowest in emerging markets. At the same time, they’re pruning their Turkey holdings amid a dearth of new catalysts.

Diametrically opposed monetary policies mark another factor for the shift. While the Bank of Russia has cut rates through the year, and last week signaled more to come, Turkey’s rising inflation is pressuring the regulator to maintain a tight policy.

Investors don’t predict a wholesale fall from grace for Turkey, but they’re putting the breaks on the pace of buying. U.S. investors poured about $90 million into VanEck Vectors Russia Exchange Traded Fund in September this year, after seven months of outflows. That compares with no inflows since June for the iShares MSCI Turkey ETF, the biggest exchange-traded fund focused on Turkish equities.

While Russia benefits from increases in commodity prices, Turkey suffers because it’s a net importer. High risks and high returns in both markets mean traders typically weigh the two countries against one another when stock picking in eastern Europe, the Middle East and Africa. Russia’s Micex Index and Turkey’s Borsa Istanbul 100 Index have seen an 8.2 percent loss and a 35 percent gain, respectively, this year. Turkish stocks are headed for their first monthly drop in ten.

Here’s what investors are saying about the Turkish-Russian rotation:

Ekaterina Iliouchenko, a fund manager at Union Investment in Frankfurt, took profit on Turkish Airlines and is buying Russian stocks, including miners Alrosa PJSC, MMC Norilsk Nickel PJSC, Polyus PJSC and Magnitogorsk Iron & Steel Works PJSC:

  • “It makes sense to make the switch from Turkey into Russia right now. The Turkish market has been rallying this year because of the past underperformance, stable lira and support for corporate lending from the Credit Guarantee Fund."
  • “In the meantime, the Russian market lagged behind Turkey and valuations look attractive. All the steel stocks look appealing because China is driving up the price of steel. Telecom shares are also attractive. So are the banking stocks because of their profitability and as the regulator cleans up the banking system.”
  • “Low inflation and the Bank of Russia’s rate cuts are helping Russian stocks. The stable ruble makes it easier to forecast corporate profits.”

Anastasia Levashova, a fund manager at Blackfriars Asset Management Limited in London:

  • “There was a very clear and pronounced buy Russia, sell Turkey switch from the end of August. After a rally that has seen a more than 40 percent gain, investors are probably struggling to find upside in most liquid names. And with Russian names providing about 4 percent to 10 percent dividends there can be an argument made for switching to Russia.”
  • “Oil-price recovery from the low $50s to mid $50s also helped, as well as the central bank of Russia cutting rates again by 50 basis points and increasing the gross domestic product growth forecast to 1.7-2.2 percent.”
  • “So momentum at the moment is favoring Russia. I don’t expect Turkey to be completely out of favor as it’s still not a bad story with the prospect of more than 5 percent GDP growth this year and probably about 4 percent next year.”

Mathieu Negre, the head of emerging-market equities at Union Bancaire Privee UBP SA:

  • “We are overweight on both countries, but Russia looks a little bit better right now as it is supported by oil price strength, the valuation is cheaper and it is less susceptible to suffer from an interest-rate increase in the U.S., should it happen.”
  • “Russia’s macro dynamic is supportive with inflation stabilizing and growth, wages, consumer confidence turning the corner."

Julian Rimmer, an emerging-markets trader at Investec Bank Plc in London:

  • “I would argue that Russia has started to eat into Turkey’s first-half outperformance mostly because the oil price has rebounded strongly and the Bank of Russia has a clear path towards cutting rates whereas the Turkish central bank has its hands tied by sticky inflation trends.”
  • “Additionally, I think the perception of political risk has shifted in Russia’s favor. Anti-Russian hysteria associated with the U.S. elections has subsided somewhat, whereas in Turkey, perennially volatile regional politics are complicated further by the Kurdish independence referendum.”
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