For a country whose political scene is not at its best, Turkish equities have done quite well thus in 2017. Until February 13, the MSCI Turkey Index is up 8.8% for the year. In the same period, the iShares MSCI Turkey ETF (TUR) has risen 9.3%.
The MSCI Turkey Index has beaten both the MSCI Emerging Markets Europe as well as Emerging Markets Eastern Europe indices which are up 3.4% and 3.1% respectively in the aforementioned period. Also, among European emerging markets, the Turkey’s 8.8% returns are second only to Poland. Its performance has even surpassed the entire Emerging Markets Index, which is up 8.5% for the year.
Interestingly, this rally in Turkish equities has continued despite the credit rating downgrade handed to the nation towards the end of January.
Why are investors rushing to Turkish equities?
Theoretically, a credit event, especially to non-investment grade, would trigger a sell-off in the concerned market. However, while Turkish equities have risen post the latest downgrade, its bonds had greeted the move by rallying, i.e. with falling yields.
The primary reason why investors are rushing towards Turkish equities is that when it comes to emerging markets in Europe, it is still hard to find better value than Turkey offers, aside from Poland, and possibly, Hungary. After the failed military coup attempt last year, Turkish equities have become cheap. The P/E ratio of the TUR ETF is at 9.87 as of February 13. Thus, investors have shrugged off the credit rating downgrade and continued to pile into stocks due to cheap valuations.
Another reason for the rise is that many investors had predicted an even sharper cut to the country’s credit rating in January. Further, with Fitch leaving the outlook as ‘stable’ instead of downgrading it to ‘negative’ investors were emboldened to buy Turkish stocks.
Apart from stocks, the country’s currency has also rallied. Let’s look at it more closely in the next article.