Invest in Turkey now, say contrarian analysts

The stampede out of emerging markets, especially Turkey, has taken panic proportions – but for some analysts this means now is a good time to invest in Turkey.

The Central Bank of Turkey’s decision earlier this week to hike interest rates sharply in face of a rapidly falling currency and rising inflation “marks a potential clean break and reengagement with the market” for analysts at Bank of America Merrill Lynch.

“We believe it’s time to constructively engage in some serious bottom fishing in Turkey,” they wrote in a market note.

“Thanks to our conviction that there is enough book value clarity in the banks for patient investors to now take a view, and with the heavy market weight of the banks – we think it’s now right to be Overweight on a full 2014 view.”

Turkish banks trade at a discount to peers in high-growth countries such as Mexico, Thailand and the Philippines, the analysts pointed out.

The 12-month forward price/earnings ratio for the whole Turkish stock market is around 8, compared with a PE of 10 for Thailand and around 18 for the Philippines and Mexico.

Investors use the price/earnings ratio to gauge how expensive a stock is. The lower the ratio, the cheaper the stock, as a low PE ratio is seen as a sign that the company’s equity is trading at a smaller multiple of its earnings, which means the share price has the potential to increase.

The Bank of America Merrill Lynch analysts argue that to invest in Turkey now is to factor in a return of earnings later in the year.

Many Turkish companies stand to profit from a recovery in the eurozone, while a weaker Turkish lira could actually benefit exporters.

Apart from Turkey, the analysts recommend overweight positions in Russia’s oil sector but also in its non-energy stocks, which are really cheap compared with other markets, in Poland and in frontier markets Nigeria, Qatar and Saudi Arabia.

A survey of fund managers earlier in January showed that capitulation was near in emerging markets, just before the selloff triggered by fears over continuous tapering of the Federal Reserve’s quantitative easing policy of printing money.

During the past week, investors pulled out $9 billion from emerging market stocks and bonds, data from fund tracker EPFR Global quoted by Reuters showed.