Buy when there is blood in the streets

You should know the title as it comes from Nathaniel Rothschild, the father of central banking. It is true, that during turmoil most investors are scared for their assets and many assets plunge to very attractive levels.

Normally this saying applies only to financial markets but the unstable situation in Turkey – when 200 people lost their lives – made Turkish equities very attractive. I bought ETF giving me exposure to Turkish stocks.

Rothschild photo
Photo by Beinecke Library

Do not get me wrong. Equities, for now, is by far my least favourite group of assets. In most developed markets we see a mature bull market and the risk of a nose dive is too big. What we see is central banks doing everything they can to continue this ‘recovery’ with printing and their interventions. As a result, free money still can find its way into tangible assets. Here we can see the disparity. On one hand, we have very expensive developed markets (85% of the global capitalisation of the global financial market) and very cheap emerging markets, on the other hand.

During first years of this bull’s market, between 2009 and 2011, we saw equities gaining all over the world. Later different markets diverged and DM continues to grow (especially in the US) while EM experienced either horizontal movement or falls.

Turkey was a cheap market even when compared to the rest EM. This is mostly because of very weak Turkish currency.

Turkish stocks are at very attractive levels, I mentioned this before during my articles, lectures and webinars. Also, back then, I mentioned the risk of possible Russian retaliation for shooting down Russian plane.  The revenge pushing prices down by 15% indeed came but from a different side. Now the potential for growth outweighs the risk.

Why Turkey?

We already know that equities in EM are cheaper than in the developed world. What is more, during last 3 years, Turkish stocks lost even compared to the index of emerging markets.

Despite the political situation of Ankara being unstable, the potential for growth should be rewarding enough to stomach it. P/E at 8.97; P/BV 1.18; CAPE around 9. The market here is not cheaper than Russian but it has a very good long-term prospect. Adding to this a very positive reaction to Erdogan reclaiming his position which, I believe, is going to continue in the following weeks.

Now let us analyse bigger picture. Turkey has very low public debt, only 33% of GDP and GDP growth of 4.8% while Turkish lira plummeted during last 5 years. From the geopolitical side, the situation may look better than expected. Authorities aim to put themselves as a beneficiary of the competition between Russia and EU, or rather SCO and NATO. Both sides count on good relations with Ankara and this gives Erdogan very healthy negotiating position. Demographic image of Turkey is its strong point.

What about risks? Turkish stock market is dependent in 44% on banks and insurance companies but seeing the level of interest rates in Turkey – 7.5% – and low debt, Turkey is much safer than Europe.

Source: www.ishares.com

Summary

The equity market in Turkey is attractive. Since 15 July, I strongly believe those assets are worth investing in. The overall outlook is good for this cheap market but in case central banks of developed world will not regain control over the situation with their printing attempts, all financial markets are going to experience the slump.

However, if central planners aim at lowering the level of global debt through the destruction of currencies, free capital in times of skyrocketing inflation should end up in cheaper emerging markets (e.g. Turkey).

This trend was visible in the first half of 20166 when the capital moved from developed countries to emerging markets. Brazil experienced 66% jump, Russia 25% and Turkey (even with a coup) gained 8% – better than even S&P.

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Considering inflation scenario which looks more and more probable, the price of equities in developed markets are going to stand still or raise similarly to the inflation rate. Equities in EM have a potential to double in 5 years’ time. Being careful, Russia and Turkey is my only exposure for now.

 

Trader21