Irrational exuberance a la Turca

Author: Emre Deliveli  ·  January 25th, 2013  ·  1900http%3A%2F%2Fwww.economonitor.com%2Femredeliveli%2F2013%2F01%2F25%2Firrational-exuberance-a-la-turca%2FIrrational+exuberance+a+la+Turca2013-01-25+18%3A20%3A38Emre+Delivelihttp%3A%2F%2Fwww.economonitor.com%2Femredeliveli%2F%3Fp%3D1900 › Share This Print

As I argued in my Jan. 11 column and later at my blog, last week’s rally in Turkish assets was caused by money flowing into emerging markets.

Negative economic news, such as lower growth forecasts from the World Bank and Germany, tampered with capital inflows this week. As a result, while emerging markets’ stocks fell to a one-week low and their currencies weakened on Jan. 16, Turkish equities reached new highs. What’s going on?

Here is the intro. to my Hurriyet Daily News (HDN) column from last Friday, where I argue that there is a bubble forming in Turkish equities. You can read the whole thing at the HDN website.

While this column got published in HDN last Friday, I wanted to wait for one week to show you the inflows into bonds and equities, which are published by the Central Bank with a lag of one week:

So this is basically a flows-driven rally, as flows into Turkish assets managed t surpass the robust flows to other EMs. But remember that, as my trader friends reminded me, the Turkish equities market is shallower and more foreigner-dominated than government bonds. Therefore, they respond very quickly and strongly to foreigner flows, and more generally to changes in sentiment.

There was also quite a bit of impact from rumors of a second ratings upgrade from Moody’s during this amazing run of Turkish equities. This past Tuesday is a case-in-point:

Equities rallied in the morning when Moody’s announced a conference call on Turkey.  The ratings agency said that the call would not be about a ratings upgrade in the afternoon to quell the rumors, and equities sold off..

Moving on, I should say I got quite bit of reader feedback for this column. One of my readers mentioned the risk of Turkey getting blacklisted by the Financial Action Task Force (FATF) in February as a serious risk that could derail the ISE rally. Incidentally, this was in my list of overlooked Turkey risks for 2013 back in December. According to the Turkish papers, the necessary legislation is being debated in the Parliament, and so that risk may be eliminated soon. For some reason, I could not find the online version of the article at today’s HDN, and so I am pasting the hardcopy as a picture, thanks to my Ipad and Pressreader app, below:

Other readers have noted that fundamentals of Turkish equities, such as P/Es, don’t point to an overvalues stock market, especially when compared to peers or through time.

While I am not equity analyst, I have to admit I have read a few reports, by Turkish research houses as well as foreigners, making essentially the same point. For example, J.P. Morgan gave four reasons last week for being overweight in Turkish equities: Better expected earnings revisions, low foreign ownership (historically), reasonable valuations and low interest rates/stable lira. So I won’t be offended if you ignore my advice and join the bandwagon:) In any case, as I clarify in the column as well, I am not saying the Turkish stock market will crash tomorrow. All I am saying is that it does not make sense to expect last year’s performance, and that you may see a sharp sell-off sometime this year.

Finally, note that the ISE’s seemingly never-ending run finally came to a stop today.

So what happened? Atilla Yesilada argues that (in Turkish) CSFB, which pulled Turkish banks to normal, as well as one of the shareholders for cell operator Turkceell registering to sell its stocks.