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TURKISH MARKET PERFORMANCE IN 2006 SEEN WORST
The New Anatolian, Turkey
Dec 19 2006
It was the year when the nation boldly served notice to the world it
was now a player in the global economy, an up-and-coming powerhouse
that stood head and shoulders above other emerging stock markets.
This year, however, it has suffered a stunning reversal of fortune
that has left international investors shaken and doubtful this fallen
star will regain its footing in the short term.
What went wrong?
The Turkish stock market, the world's first-place finisher in 2005,
is on pace to be its worst performer in 2006, hurt by a surging
current-account deficit, stubborn inflation and a series of upsets
in the country's delicate effort to become part of the European Union.
In 2005, Istanbul's benchmark equities index, the IMKB-100, leaped 59%,
buoyed by exuberance about Turkey's move toward joining the E.U.
But since Jan. 1, the index is up a paltry 1%, squeezing into the
black on Friday after languishing in the red for most of 2006, a year
that saw red-hot gains in emerging markets from India to Russia.
The lira, the nation's currency, has suffered too, losing 20% of its
value against the euro while retreating 7% against the dollar.
"Turkey's a longer-term story and you have to treat it as such," said
Vladimir Milev, a financial analyst at the MetzlerPayden European
Emerging Markets Fund "If you're expecting a nice quiet ride trying
to play it, it's probably not where you should be -- it's a lot more
volatile than other emerging markets."
Emerging-market casualty That was certainly the case during the global
emerging-markets rout in May and June of this year, when Turkish
assets were hit especially hard. That's partly because the Turkish
stock market is one of the biggest and most liquid among emerging
markets - so it's easier to buy and sell.
Turkey's three main sectors outside of agriculture are banking,
energy and tourism, industries that are all especially vulnerable
to the kinds of interest-rate and currency swings -- not to mention
global inflation fears -- that swept the markets last spring.
Equity funds with $700 bln in assets were net sellers of $743 mln
in Turkish equities in June, according to Emerging Portfolio Fund
Research, a fund tracking group based in Cambridge, Mass. That's the
worst month of net selling by these funds in a single month since
the group began tracking this data in 1995.
Indeed, fund managers have been reducing their Turkey exposure all
year, partly because of the natural tendency to allocate elsewhere
when a market has outperformed.
Worldwide, emerging-market equity funds tracked by Emerging Portfolio
Fund Research pared their Turkey weighting to 2.3% from 3.3% at the
beginning of the year. Emerging Europe equity funds have cut their
weighting to 9.4% in the same period from 10.8% at the start of 2006
and cut it to as low as 7.4% in the May-June period.
"We've had six straight weeks of new inflows into emerging-market
funds, but emerging-Europe funds have had 12 straight weeks of
outflows," said Brad Durham, a managing director with Emerging
Portfolio Fund Research. "Some of that is reallocation to Asia,
which benefits from lower energy prices. But some is due to worry
about deficits and political uncertainty."
A ballooning deficit In recent days, Turkish statistics officials said
the nation's foreign-trade deficit rose to $4.4 bln in October, up
33% from a year ago and higher than the $3.7 bln that most economists
expected. For the year so far, the trade gap stands at $44.6 bln.
Based on that data, the October current account deficit is expected to
rise to $2.7 bln from $895 mln in October of 2005, and to be above 9%
of gross national product by the end of 2006, according to economists
at Deutsche Bank in a note.
"We don't expect a major improvement in 2007 unless a prolonged/sharp
lira depreciation and/or a sharp economic slowdown takes place,"
said economist Serkan Gonencler. "Such a high deficit will continue
to pose serious risks to the current economic equilibrium."
The deficit isn't the only bugbear. Inflation in consumer prices stood
at 10.6% in September, according to data from the Turkish central bank,
way above its target of 4%.
Policy-makers have responded with a series of interest-rate hikes
this year that have pushed rates sharply higher. Turkey has two key
short-term rates, a borrowing rate that banks can borrow at and a
higher lending rate that allows them to earn a spread.
The overnight borrowing rate is now 17.5%, or 4 percentage points
higher than its December 2005 level. The overnight lending rate
now stands at 22.5%, up from 17.5%. At the height of the summertime
sell-off, the central bank convened an emergency meeting on a Sunday
night and in one fell swoop ordered an increase of 225 basis points.
The battle for Europe But the issue that has likely unsettled investors
the most in 2006 is the trouble that Turkey's had in the first of its
accession negotiations with the E.U. Talks that were launched with
great fanfare in 2005 have stumbled this year, mostly because of a
dispute over Cyprus, an island divided between a Turkish-controlled
north and Greek-controlled south since 1974.
The European Commission has now suspended eight of the 35 "chapters,"
or specific areas of negotiation with Turkey on membership, because
of Ankara's failure to recognize Cyprus as an independent nation and
also to open its ports to Cypriot ships.
Brussels had given Turkey a Dec. 6 deadline to meet the conditions
on Cyprus, but talks hosted by Finland, which held the rotating E.U.
presidency until Germany took over this week, broke down without
agreement. E.U. Enlargement Minister Olli Rehn said he now expects
accession talks will be slowed.
Recognition of Cyprus remains a key condition for Turkey. The Turks
are refusing to meet the demand until the E.U. honors a promise to
ease an embargo on northern Cyprus. In fact, Turkish Cypriots voted
to accept a United Nations-based plan to reunify the island back in
2004, while Greek Cypriots rejected it. Cyprus became an E.U. member
shortly after and is threatening to boycott Turkey's bid.
The commission's actions are "bad news," said Ahmet Akarli, a Goldman
Sachs analyst. They Cyprus issue is unlikely to be resolved before
Turkish and Cypriot elections in 2007 and early 2008, Akarli said.
Not everyone is so gloomy. Baturalp Candemir, chief economist
at Istanbul-based EFG Istanbul Securities, said he believes the
commission's decision could even be a positive for Turkey as it
removes a major overhang on the market.
"We suggest that investors take advantage of any weakness as a buying
opportunity," Candemir wrote in a note to clients.
Enlargement fatigue Cyprus isn't the only stumbling block. A number of
western European governments have demonstrated so-called enlargement
fatigue since the E.U. said Romania and Bulgaria will become members,
effective next month. France and Austria have both made clear their
opposition to Turkey's entering the E.U. fold. Lawmakers in Paris even
took the provocative step of passing legislation making it illegal
to deny Turkey's role in the Armenian genocide of 1915.
Turkey strongly denies responsibility and called the October law a
serious blow to diplomatic relations between the two countries.
Countries that support Turkey's accession bid have long argued that
the predominantly Muslim nation of 70 mln could form an important
bridge between the Islamic Middle East and Western Europe. They
have also argued that Turkey would form an important new market for
European business.
Still, most experts believe Turkey will eventually become an E.U.
member. The country is not expected to be ready with reforms until
2014.
"This [the talks] is a process that's going to take a decade, so it
makes no sense to get bent out of shape over short-term decisions,"
said MetzlerPayden's Milev. "Turkey has a number of social, political
and economic issues to resolve, but at the end of the day, it's
a big country by European standards, and it's an interesting and
large stock market with opportunities, as long as you don't take a
short-term view."
The New Anatolian, Turkey
Dec 19 2006
It was the year when the nation boldly served notice to the world it
was now a player in the global economy, an up-and-coming powerhouse
that stood head and shoulders above other emerging stock markets.
This year, however, it has suffered a stunning reversal of fortune
that has left international investors shaken and doubtful this fallen
star will regain its footing in the short term.
What went wrong?
The Turkish stock market, the world's first-place finisher in 2005,
is on pace to be its worst performer in 2006, hurt by a surging
current-account deficit, stubborn inflation and a series of upsets
in the country's delicate effort to become part of the European Union.
In 2005, Istanbul's benchmark equities index, the IMKB-100, leaped 59%,
buoyed by exuberance about Turkey's move toward joining the E.U.
But since Jan. 1, the index is up a paltry 1%, squeezing into the
black on Friday after languishing in the red for most of 2006, a year
that saw red-hot gains in emerging markets from India to Russia.
The lira, the nation's currency, has suffered too, losing 20% of its
value against the euro while retreating 7% against the dollar.
"Turkey's a longer-term story and you have to treat it as such," said
Vladimir Milev, a financial analyst at the MetzlerPayden European
Emerging Markets Fund "If you're expecting a nice quiet ride trying
to play it, it's probably not where you should be -- it's a lot more
volatile than other emerging markets."
Emerging-market casualty That was certainly the case during the global
emerging-markets rout in May and June of this year, when Turkish
assets were hit especially hard. That's partly because the Turkish
stock market is one of the biggest and most liquid among emerging
markets - so it's easier to buy and sell.
Turkey's three main sectors outside of agriculture are banking,
energy and tourism, industries that are all especially vulnerable
to the kinds of interest-rate and currency swings -- not to mention
global inflation fears -- that swept the markets last spring.
Equity funds with $700 bln in assets were net sellers of $743 mln
in Turkish equities in June, according to Emerging Portfolio Fund
Research, a fund tracking group based in Cambridge, Mass. That's the
worst month of net selling by these funds in a single month since
the group began tracking this data in 1995.
Indeed, fund managers have been reducing their Turkey exposure all
year, partly because of the natural tendency to allocate elsewhere
when a market has outperformed.
Worldwide, emerging-market equity funds tracked by Emerging Portfolio
Fund Research pared their Turkey weighting to 2.3% from 3.3% at the
beginning of the year. Emerging Europe equity funds have cut their
weighting to 9.4% in the same period from 10.8% at the start of 2006
and cut it to as low as 7.4% in the May-June period.
"We've had six straight weeks of new inflows into emerging-market
funds, but emerging-Europe funds have had 12 straight weeks of
outflows," said Brad Durham, a managing director with Emerging
Portfolio Fund Research. "Some of that is reallocation to Asia,
which benefits from lower energy prices. But some is due to worry
about deficits and political uncertainty."
A ballooning deficit In recent days, Turkish statistics officials said
the nation's foreign-trade deficit rose to $4.4 bln in October, up
33% from a year ago and higher than the $3.7 bln that most economists
expected. For the year so far, the trade gap stands at $44.6 bln.
Based on that data, the October current account deficit is expected to
rise to $2.7 bln from $895 mln in October of 2005, and to be above 9%
of gross national product by the end of 2006, according to economists
at Deutsche Bank in a note.
"We don't expect a major improvement in 2007 unless a prolonged/sharp
lira depreciation and/or a sharp economic slowdown takes place,"
said economist Serkan Gonencler. "Such a high deficit will continue
to pose serious risks to the current economic equilibrium."
The deficit isn't the only bugbear. Inflation in consumer prices stood
at 10.6% in September, according to data from the Turkish central bank,
way above its target of 4%.
Policy-makers have responded with a series of interest-rate hikes
this year that have pushed rates sharply higher. Turkey has two key
short-term rates, a borrowing rate that banks can borrow at and a
higher lending rate that allows them to earn a spread.
The overnight borrowing rate is now 17.5%, or 4 percentage points
higher than its December 2005 level. The overnight lending rate
now stands at 22.5%, up from 17.5%. At the height of the summertime
sell-off, the central bank convened an emergency meeting on a Sunday
night and in one fell swoop ordered an increase of 225 basis points.
The battle for Europe But the issue that has likely unsettled investors
the most in 2006 is the trouble that Turkey's had in the first of its
accession negotiations with the E.U. Talks that were launched with
great fanfare in 2005 have stumbled this year, mostly because of a
dispute over Cyprus, an island divided between a Turkish-controlled
north and Greek-controlled south since 1974.
The European Commission has now suspended eight of the 35 "chapters,"
or specific areas of negotiation with Turkey on membership, because
of Ankara's failure to recognize Cyprus as an independent nation and
also to open its ports to Cypriot ships.
Brussels had given Turkey a Dec. 6 deadline to meet the conditions
on Cyprus, but talks hosted by Finland, which held the rotating E.U.
presidency until Germany took over this week, broke down without
agreement. E.U. Enlargement Minister Olli Rehn said he now expects
accession talks will be slowed.
Recognition of Cyprus remains a key condition for Turkey. The Turks
are refusing to meet the demand until the E.U. honors a promise to
ease an embargo on northern Cyprus. In fact, Turkish Cypriots voted
to accept a United Nations-based plan to reunify the island back in
2004, while Greek Cypriots rejected it. Cyprus became an E.U. member
shortly after and is threatening to boycott Turkey's bid.
The commission's actions are "bad news," said Ahmet Akarli, a Goldman
Sachs analyst. They Cyprus issue is unlikely to be resolved before
Turkish and Cypriot elections in 2007 and early 2008, Akarli said.
Not everyone is so gloomy. Baturalp Candemir, chief economist
at Istanbul-based EFG Istanbul Securities, said he believes the
commission's decision could even be a positive for Turkey as it
removes a major overhang on the market.
"We suggest that investors take advantage of any weakness as a buying
opportunity," Candemir wrote in a note to clients.
Enlargement fatigue Cyprus isn't the only stumbling block. A number of
western European governments have demonstrated so-called enlargement
fatigue since the E.U. said Romania and Bulgaria will become members,
effective next month. France and Austria have both made clear their
opposition to Turkey's entering the E.U. fold. Lawmakers in Paris even
took the provocative step of passing legislation making it illegal
to deny Turkey's role in the Armenian genocide of 1915.
Turkey strongly denies responsibility and called the October law a
serious blow to diplomatic relations between the two countries.
Countries that support Turkey's accession bid have long argued that
the predominantly Muslim nation of 70 mln could form an important
bridge between the Islamic Middle East and Western Europe. They
have also argued that Turkey would form an important new market for
European business.
Still, most experts believe Turkey will eventually become an E.U.
member. The country is not expected to be ready with reforms until
2014.
"This [the talks] is a process that's going to take a decade, so it
makes no sense to get bent out of shape over short-term decisions,"
said MetzlerPayden's Milev. "Turkey has a number of social, political
and economic issues to resolve, but at the end of the day, it's
a big country by European standards, and it's an interesting and
large stock market with opportunities, as long as you don't take a
short-term view."