* 2H14 outlook: Gearing down from risk-on to selectivity
* Further relative re-rating unlikely, as certain challenges in Turkey and overseas rise to the top of the agenda
Equities have risen a significant 27% since late March on eased political risks,
subdued inflationary pressure in the US, the ECB’s significant liquidity addition,
revert of monetary policies and also a reversal in the earnings revision cycle.
The sharp rally has been justified by a relative decrease in tail risks, as well as
attractive valuations at the time, and that TR equities could continue to rise in
absolute terms as long as capital flows in. We reduce our RF rate by 100bps to
reflect the changed risk perception, and our new bottom-up index target of
c.87,400 now offers 14% upside potential. Although P/E/ EV/EBITDA multiples
are climbing to 11x/8.7x and trading almost at par vs. EM peers, we believe
near-term catalysts are largely priced in. We think further outperformance will
be intimidated by issues like Iraqi contagion, a potential rise of political tension,
the kick-start of the Fed’s monetary policy normalization process sooner than
expected and less attractive relative valuations.
* Banks: further outperformance to rely on fundamentals; selectiveness required
The NIM outlook has improved, the normalization process in CoRs is likely to
be slower on improvement in the growth outlook and strength in collections,
and fee revenues should be higher through acceleration in retail loan growth.
Owing to expectations of a stronger top line and the relatively better asset
quality outlook, banks have rallied from March-end, while the revision cycle
has reversed. We think further outperformance will rely on fundamentals, and
that parameters like liquidity, the strength of the deposit franchise, the extent
of the maturity mismatch, the structure of the loan book and the vulnerability
to regulatory risks have all been differentiating factors across TR banks. We
recommend Overweight positions in REIT, Telecom, Metals & Mining, White
Goods, Aviation and Construction, are Underweight on Utilities, Beverages,
Retail, Insurance and Oil & Gas, and Neutral on Banks, Autos and Glass.
* Top picks: Arcelik, Aygaz, CCI, Emlak, Ford Otosan, Garanti, Sabanci, Turkcell
We are adding Garanti to our picks (upgraded to Buy) on a relatively more
favorable risk/reward profile post valuation/earnings increases and a poor
performance vs. its peers over the last three months (page 15). Emlak REIT is
one of our top picks, as the stock is still trading at a c.17% discount to NAV,
while current NAV is yet to capture recent tenders, implying a higher effective
discount (c.25%). Arcelik is now top pick, as a decent play on potential
European market recovery and potential stronger performance in electronics in
2014/15. We remove Turkish Airlines from the list, as, from a tactical point of
view, we see risks to the downside, given the rising geopolitical risk that could
increase oil prices and downside risks on consensus earnings estimates.