Analysts expect repricing of Turkey’s stocks after Erdogan's power grab

By bne IntelliNews April 24, 2017

Analysts are expecting a repricing of Turkey’s stocks given the increased risk investors will have to tolerate in the country following President Erdogan’s “power grab”, according to the founder of an asset management firm.

In a piece for the Gadfly column of Bloomberg, Nir Kaissar, who founded Unison Advisors, wrote on 20 April: “…even if Turkey’s flirtation with authoritarianism proves to be a boon to its economy – which I highly doubt – it will most likely be a bust for stockholders of Turkey’s companies.”

The ascent of Erdogan - who is to head an executive presidency with sweeping powers if opponents fail in their appeal to overturn his contested narrow victory in Turkey’s April 16 referendum – would raise “serious questions about the rule of law and private property rights in Turkey going forward, which means greater uncertainty for Turkey’s companies”, he added.

Investors were probably now set to demand greater compensation for taking more risk in Turkish companies and, invariably, such a risk premium comes about through a repricing of assets, Kaissar noted.

Earnings per share for the Borsa Istanbul 100 index are expected to grow by 20% in 2017 and by 19% in 2018, but despite that earnings growth the index’s P/E ratio is projected to shrink from 10.9 to 7.6 by the end of 2018, he said.

Just as in Russia, where Vladimir Putin has eroded Russia’s rule of law, lower valuations in Turkey would mean stock prices failing to keep pace with earnings growth, added Kaissar, also observing:  “It would also mean that future investors require an earnings yield of 13% to invest in Turkey’s companies, which implies a risk premium of nearly 45% over the current earnings yield of 9%.”    

A meaningful portion of share gains have historically come from expanding valuations – or the willingness of investors to pay ever greater prices for stocks over time – “but as long as questions about the rule of law persist in Turkey, that isn’t likely to happen”, Kaissar concluded.

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