(Bloomberg) -- Turkish stocks haven’t been this cheap in almost a decade, but that doesn’t mean they’re a slam dunk.
Just two weeks after markets celebrated President Recep Tayyip Erdogan’s call for snap elections, a move that condensed a period of political uncertainty from 19 months to two, investors are beginning to reconsider the premise of that rally. The economy’s still overheating, and analysts are starting to doubt an easy victory for the incumbent.
As investors reassess their initial reaction to the news, Turkish stocks are headed for their biggest monthly slump since May 2016, pushing the price-to-estimated earnings ratio of the benchmark Borsa Istanbul 100 Index to 7.2. The gauge was already one of the cheapest among emerging markets and now trades at the lowest multiple since 2009. The lira traded little changed even after the central bank raised rates by 75 basis points last week.
Investors were “operating under the assumption that President Erdogan will win in the first round and the Ak Party-MHP alliance will get a majority,” said Anastasia Levashova, a fund manager at Blackfriars Asset Management in London, referring to the ruling party and its allied nationalist group. “The market started to see new factors.”
The first cracks in that thesis appeared last weekend, when 15 lawmakers from the main opposition CHP switched over to a recently-formed nationalist spinoff, Iyi Party. That helped Iyi reach the required minimum of 20 lawmakers to qualify for a campaign. It was also the first major sign of cooperation among a fractured opposition to challenge Erdogan.
Speculation that former president Abdullah Gul could throw his hat in the ring added to that momentum. Gul, who co-founded the Islamist-rooted AK Party with Erdogan in 2001, has more recently criticized the government’s clampdown on dissent after a failed 2016 military coup. On Saturday, he said he wouldn’t run because a broad-based consensus among opposition parties for his nomination wasn’t reached.
While Erdogan’s likely to get the most votes in the first round on June 24, “there are high risks” that he’ll lack the 50 percent required for a quick win, Levashova said. So political uncertainty remains, along with concerns that the central bank is behind the curve in raising rates and a looming sentence of Turkish banker Hakan Atilla, who was convicted of using his position at a state lender to help run a massive scheme to evade U.S. sanctions on Iran.
Banking stocks led the Borsa Istanbul 100 Index down 3 percent last week, taking the monthly retreat to 6.8 percent. Lenders underperformed the broader market by almost 20 percent in the past year, spurring Investec Bank Plc’s Julian Rimmer to go out on a limb and recommend buying the two biggest private lenders.
“I’ve been unwaveringly bearish on Turkey for about six months, yet I think both Akbank and Garanti now look appealing after 25 and 30 percent falls respectively in USD terms," he said on Friday. “Ak and Garanti both demonstrated they can be super-successful no matter how difficult the operating environment. I think time to build a position in Garanti, especially,” he said, citing a valuation near its cheapest ever at 0.77 times price-to-book value.
Other investors’ concerns are compounded by what they see as an impending and perhaps inevitable economic slowdown. Turkey’s economy grew an impressive 7.4 percent last year, but the expansion came at the expense of one of the widest current-account deficits among G20 nations and double-digit inflation.
U.S. Treasury yields above 3 percent encouraged investors to avoid risking cash in Turkish equities and seems to have reminded them of “idiosyncratic risks and uncertainties” that the Turkish economy faces, said Sertan Kargin, director of research at Global Securities in Istanbul.
“The balance between growth and the current account has deteriorated recently and it cannot continue like this,” Kargin said. “Uncertainty regarding the efficiency and capability of the new government that will be formed after the vote to address this problem is weighing on the BIST 100 Index, and it seems like it’s going to be the case until elections are over.”
For some others, Turkey’s big year for initial public offerings is another reason source of pressure for the country’s shares as foreign investors are rather shuffling their investments instead of putting fresh money, according to Teb Investment’s strategist Isik Okte.
“All foreign investors are doing is rotating money out of their winners and if they happen to believe in the the story of the initial public offering, they invest. Turkey is the worst-performing emerging market in 2018 because foreign institutional interest remains low outside the steel sector, and the locals are dominating the action, ” Okte said.
©2018 Bloomberg L.P.