Turkish stocks set a series of records this week as investors cheered an overhaul of the country’s economic management. And they appear ready to buy more, provided policymakers keep sending the right signals.
News of progress on a Covid-19 vaccine has helped, but the biggest boost for the benchmark Borsa Istanbul 100 Index came from President Recep Tayyip Erdogan’s pledge of a market-friendly approach to the economy. The departure of his son-in-law as economy czar and the ouster of the central bank chief has spurred stellar gains for all Turkish assets as money managers anticipated a return to orthodox policies.
“The new appointments to the top economy management and the respective pledges have given us positive clues about the government’s potential change of mind regarding the economical crisis,” said Ogeday Topcular, a fund manager at RAM Capital SA in Geneva. “Now, it will be more about the sustainability of that stance.”
A fresh policy approach adds to already enticing valuations on Turkish stocks. Both the benchmark Istanbul index and a gauge of the nation’s banking stocks trade at a discount of more than 50% to their emerging-market peers.
The changes in Ankara are “encouraging” and “could at least temporarily solve Turkey’s acute problem of low investor confidence,” said Mathieu Racheter, an emerging-market strategist at Julius Baer in Zurich. Given the deep valuation discounts, the rally has further to run if Erdogan follows through with investor-pleasing policy, he said.
Topcular noted that the surge in Istanbul stocks, up a world-beating 28% in November in dollar terms, is purely based on traders’ evaluation of recent developments. “We have not seen many tangible steps yet.”
This Thursday’s central bank meeting is looming large as the first litmus test of investor sentiment. Racheter termed the event a “make-or-break moment,” given high expectations of an interest-rate increase that he said leave no room for disappointment. Economists from Goldman Sachs Group Inc. and Societe Generale SA are among those expecting a hike of at least 400 basis points in the key one-week repo rate.
Momentum or Overbought?
HSBC Holdings Plc analysts shifted their stance on Turkish stocks to a tactical overweight one from neutral on Friday, citing “significant opportunity.” They noted that those interested in the trade “have to be prepared to move swiftly” as Istanbul equities tend to change direction rapidly and don’t necessarily sustain their direction for long periods.
A technical indicator that’s flashing an overbought signal on the Istanbul benchmark should rather be interpreted as auguring further gains, according to Andy Dodd, a technical analyst at Louis Capital Markets UK LLP.
After closing at record levels on three sessions this week, the gauge’s 14-day relative strength index has raced beyond 70, a threshold sometimes viewed as suggesting a market has accelerated too quickly and may be poised to pull back.
“RSI above 70 is common in a strong uptrend and not a sell signal at all,” said Dodd, who pointed to prospects for “a bullish break to new highs above 1,245.37” on the index, a level breached for the first time on Nov. 11.
Some battle-hardened veterans of the Turkish equity market have seen similar bouts of enthusiasm before and are choosing to keep their powder dry until there is clearer evidence of a new policy direction. Erdogan’s time in power has seen previous attempts at U-turns forced upon him by market pressure, which proved short-lived. Even on Nov. 11, the Turkish leader repeated his widely discredited view that lowering interest rates would also reduce inflation.
“Markets would need to see several Monetary Policy Committee meetings where transparency, orthodoxy, predictability and sound economics were predominant before large international institutions will reconsider this market as a realistic investment alternative,” said Julian Rimmer, an emerging markets trader at Investec Bank Plc.
The direction of traffic so far in 2020 is clear: foreign investors had sold a net $5.8 billion of Turkish stocks through Nov. 6, more than any year since the central bank records began in 2005.
“People are mistaking standard tactical expedience for a fundamental philosophical shift, and this pattern has been endlessly repeated for a decade,” Rimmer said. “Nothing would bring me greater pleasure and optimism for Turkey were I to be proven wrong.”
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