Mobius buys more as Turkish stocks hit record-high

Templeton Asset Management’s Mark Mobius plans to increase his holdings of Turkish stocks, which continue to rank among the cheapest in emerging markets even after gains pushed prices to record highs.

The Istanbul Stock Exchange’s ISE-100 index rose 14 percent this year, the most among major European gauges, to an all-time peak. Valuations at 10.7 times reported earnings, the highest since March, are 30 percent below the 15.3 times multiple for the benchmark MSCI Emerging Markets Index, according to data compiled by Bloomberg.

On Thursday, İş Investment, Turkey’s biggest brokerage house, raised ISE-100 to “buy.” İş Invest also increased its 12-month price estimate to 74,000 from 68,000. The investment house cited excess global liquidity and low interest rates for the upgrade.

“We already have over $1 billion invested in Turkey today and expect to invest more,” said Mobius, who oversees about $34 billion as the Singapore-based chairman of Templeton, in an e-mailed response to questions from Bloomberg News.

“We remain optimistic about the long-term potential of the Turkish economy,” and prices are attractive, he said.

The ISE-100 climbed after the government said June 30 gross domestic product, or GDP, increased 11.7 percent in the first quarter from a year earlier and inflation slowed to the lowest since January as the country pulled out of its deepest recession in more than a decade. The growth rate was the fastest among the Group of 20 major economies, excluding China, and is comparable to the average contraction of 0.03 percent in 14 Central and Eastern European countries.

Attractive valuations

“Growth is recovering very nicely, and we are still positive on Turkey as valuations are very attractive,” said Thomas Wilson, who runs an emerging Europe fund at Schroders Investment Management in London and helps oversee about $23 billion. “The market re-rated to a certain extent, and there is scope for further positive re-rating.”

The economy is rebounding after shrinking at the fastest pace on record in the first quarter of 2009 as the global financial crisis reduced the capital inflows needed to curb the country’s current account deficit. Turkey imports almost all the oil and gas it consumes, swelling the current account gap.

While government budget deficits widen across Europe, raising concern for debt sustainability, Turkey is collecting more taxes as the economy expands, helping to curb its own financing gap and reduce the cost of borrowing.

The government’s management of the country’s debt, which has remained below the Maastricht criteria of 60 percent of economic output since 2004, prompted ratings upgrades by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings in the past seven months. The country’s debt level may peak at 49 percent of GDP this year and decline to 48 percent by 2012, according to government projections.

Turkey, which needed about $55 billion in loans from the International Monetary Fund, or IMF, from 1999 to 2008 to finance budget deficits, abandoned plans to sign a new loan accord in March. The country has no need for more lending, IMF Managing Director Dominique Strauss-Kahn said on June 9.

The budget deficit in the first six months of the year narrowed by a third from the same period of 2009 to 15.4 billion Turkish Liras ($10.2 billion), the Finance Ministry said on July 15. The government’s year-end goal is a deficit of 50.2 billion liras, or about 5 percent of GDP.

Cheap compared to peers

Stocks in Istanbul trade below the 11.5 times projected for 2010 earnings for Poland’s WIG20 Index and 14.5 times for Brazil’s Bovespa.

Garanti Bank, Turkey’s biggest bank by market value, led gains on the ISE this year, returning 28 percent compared with a 1.6 percent drop for Sberbank, Russia’s largest bank, and a gain of 5.7 percent for Poland’s PKO Bank Polski.

Garanti trades at 10.1 times 2010 estimated earnings, compared with 12.8 for Sberbank and 16.6 for PKO Bank. İşbank, Turkey’s biggest publicly traded lender by assets, has risen 33 percent this year to trade at 9.35 times estimated earnings.

Turkey’s markets are, however, vulnerable to any worsening in the credit crisis in Greece, Portugal and Spain, said Mehmet Büyükekşi, head of the Turkish Exporters’ Assembly.

“Some sort of event in the eurozone periphery is the biggest risk factor for the country as it still depends on raising money externally,” said Paul Biszko, an emerging markets strategist at Royal Bank of Canada in Toronto, in a telephone interview. “Turkey still has structural issues it has to work through.”

Stubborn rating agencies

Moody’s rates Turkey Ba2, two levels below investment grade, after lifting the country in January. Fitch raised its rating to BB+ in December, or one step below investment grade, and S&P boosted its ranking in February. All three cited budget management and the strength of Turkey’s banking system, which posted record profits last year and required no government funds after the collapse of Lehman Brothers Holdings in 2008.

The stock rally is occurring as banks lend more to consumers and companies. The Central Bank has kept the benchmark interest rate at an historic low of 7 percent, and inflation has slowed to a three-decade low.

“Turkey is in the process of transforming itself into a very competitive and fast-growing economy, backed by manageable inflation, low interest rates and a stable government,” Mobius said.

“We continue to see Turkey leading the way in the region,” said Simon Quijano-Evans, head of emerging-market research at Credit Agricole Cheuvreux in Vienna. “Markets are rewarding low debt and political credibility.”