The Turkish national flag and the Borsa Istanbul flag hang alongside financial data displayed on electronic boards inside the Borsa Istanbul, the stock exchange in Istanbul (file). JPMorgan Chase & Co says the country’s $207bn stock market has become more appealing after a combination of stalled coalition talks and Islamic State attacks sent shares toward the sharpest weekly slump in 10 months.

Bloomberg
Istanbul


Many investors are fleeing Turkey as the escalating violence along its border compounds the woes of a nation that’s gone without a government for seven weeks. But many is not all.
JPMorgan Chase & Co says the country’s $207bn stock market has become more appealing after a combination of stalled coalition talks and Islamic State attacks sent shares toward the sharpest weekly slump in 10 months. Bank of America Corp’s Merrill Lynch recommends Turkish industrial companies with strong earnings and growth prospects.
Their reasons are:
EVENTS FACTORED IN: The Borsa Istanbul 100 Index has declined 3.8% since inconclusive June 7 elections denied the ruling Justice and Development Party a majority. The gauge is also this year’s worst performer in central and Eastern Europe, except Bulgaria, driven down by the plunge in the lira and perceptions of government interference in monetary policy. Any improvement in economic or political scenarios may result in stock gains.
“I don’t think you actually need a coalition government for Turkey to outperform if the market was already pricing a fairly bad outcome,” Andres Garcia-Amaya, an emerging-markets macro research analyst at JPMorgan Investment Management, said on Thursday. “If a coalition were to occur, Turkey will outperform further.”
COMMON CAUSE FOR POLITICIANS: While investors are trading on the worst outcome from coalition talks, namely premature elections, the Islamic State attacks could force both the dominant AK Party and the opposition CHP to put the nation’s defence above their differences, Michel Danechi of Duet Asset Management Ltd said.
“It increases the chance for a coalition, so is actually positive,” Danechi, a London-based money manager at Duet, said by e-mail on Friday. “No party wants to be blamed for failing to agree on a new government at times of turbulence.”
EARNINGS UNAFFECTED: While macro-economic trends or domestic politics may be clouded, the earnings prospects of companies offer “bottom-up stock ideas,” Merrill Lynch analysts including Osman Memisoglu wrote in a report.
The analysts recommend: Turkish Airlines, which they expect to increase traffic at twice the global average; commercial-vehicle maker Ford Otomotiv Sanayi on forecasts for a tripling of profits between 2014 and 2017; Aselsan Elektronik Sanayi Ve Ticaret on earnings from new projects, and; Tekfen Holding on valuations.
OIL PRICES FALLING AGAIN: While Brent crude has plunged 19% since its 2015 high on May 6, Turkish equities lost 4.4% because of political wrangling before and after general elections. As a net importer of oil, Turkey would benefit from lower prices and this would eventually be factored into stock values.
“If perceptions of risk are moderated and the decline in oil prices sustained, we could see Turkish assets benefiting from weak commodity prices,” Pinar Uslu, a strategist at ING Bank in Istanbul, said.
VALUATION: Turkey’s benchmark index trades below its 10-year average valuation and is 19% cheaper than the broader MSCI Emerging Markets Index. Only one market across central and Eastern Europe as well as the Middle East could be considered “inexpensive” and that’s Turkey, JPMorgan analysts wrote in a report.
The gauge’s relative strength index fell to 35 yesterday, the lowest since the selloff after the election on June 7, and close to a level that indicates to some technical analysts a security is poised for a rebound.
“Put all the political noise, uncertainty aside, Turkey’s risk profile hasn’t changed, valuation has,” Garcia Amaya of JPMorgan said. “That’s one of the reasons we’re overweight.”