Fast credit growth, the recovery in credit card spending, especially the revival of housing, automotive and other durables goods demand, and better than expected high-frequency data suggest that the recovery in economies following the lock down period during the Covid-19 pandemic has been quicker than expected. The markets have thus put the slowdown in economic activity during the pandemic aside, and rather, started to price in the possibility of the acceleration of economic recovery in the 2nd half of 2020, and in 2021.
The major international institutions such as the IMF, World Bank and the OECD, however, expect the recovery in global economies to take time, and in this respect, the ample liquidity and low interest rate environment to continue for a long while.
The low interest rate environment is also likely to continue in Turkey as well, and hence, we reduce the RfR assumption we use in our valuations by 100bps to 14% from 15% previously. We believe our current RfR assumption encompasses the risks we mention below.
With the reduction in our RfR assumption and specific revisions to company-based estimates, we revise our 12M target for the BIST100 to 130.000 from 110,000 previously, and maintain our HOLD rating as our new target index level suggests a 13% upside potential.
The BIST still looks undervalued as compared to its peers; the MSCI Turkey index has been trading at 2020E P/E and P/BV of 9.38x and 0.86x, at a discount of 46% and 47% as compared to EM MSCI. However, the MSCI Turkey has been trading higher than its 5 years historical P/E average by 9.8% but lower than P/BV average by 22.5%.
The BIST100 appears to have recovered virtually all of its losses following the outbreak of Covid-19, having declined to as low as 84,000 following the spread of the pandemic, and reaching 120,000 levels thereafter. Meanwhile, non-residents’ holdings at the BIST, which were at c.65% before the outbreak of the health crisis, have retreated to below 52%, and domestic institutional and individual investors have become increasingly interested at the BIST against a backdrop of low interest rates.
Interest rates are expected to remain low, and the domestic investors’ disposition and related momentum created at the BIST are also expected to continue. Still, the discrepancy between the course of the financial markets and that of the economy harbours a risk of strong profit taking.
We thus maintain the companies that could be relatively less affected by the pandemic and those that could recover faster with the help of the support measures introduced, and the banking sector stocks, which still have relatively attractive valuation in our portfolio.
Main market risks
The intensification or spreading of the virus leading to a new and extended period of quarantines/lockdowns.
The recovery in global economic activity being low and fragile, leading global economies to enter into a depression, following their sudden halt after the outbreak of the COVID-19 pandemic.
Rising costs due to social distancing rules, and/or ongoing monetary expansion (incentivized domestic demand) leading to a higher than expected inflation and C/A deficit, which might render the maintenance of current interest rate and currency levels difficult.
Local geopolitical issues (Syria, Libya, Cyprus, etc.) and intensification of the US-China debacle.
By Economist Serkan Gonencler, Seker Yatirim Invest
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