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BGC Partners Strategy Update: "Near term outlook deteriorates"

Turkish equities have de-rated… Rising political risk and deteriorating macro picture have led to the continuation of de-rating of Turkish equities in 1H18. The underperformance over its EM peers have reached 29% YTD, 40% on 3-year, and 60% on 5-year bases, bringing relative valuations to levels seen only in the aftermath of 2001 financial crisis. Following the revisions, we calculate that Turkish equities trade at 7.2x on 2018 and 5.8x on 2019 forecast earnings. Based on 2018 P/E multiple, Turkish equities trade at 27% discount to its 5-year historical average and 47% discount to GEM median. Regardless of the outcome of elections, macro figures are likely to worsen over the coming months as rising inflation should not let interest rates fall and widening C/A deficit should continue weighing on TL. We believe that Turkish equities will trade at about 10% discount to its historical average or at around 9.0x to its forecast 2018 earnings. We reduce our BIST target by 5% to 127k, implying a 24% upside potential from current levels. That said, we do not expect equities to rerate unless we see an improvement in inflation and interest rates until 4Q18.