Credit Suisse sticks to overweight stance on Turkish equities

Credit Suisse strategists stuck to their upbeat view on Turkish equities despite the short-term political risks, putting forth half a dozen reasons to back up their argument.

That followed a recent pull-back in MSCI Turkey which saw it give back the majority of its US dollar outperformance versus the broader MSCI index for emerging market economies since the start of December 2015.

For starters, analysts Alexander Redman and Arun Sai pointed out how cycles of outperformance for the country's equities typically last for 16.5 month, whereas the duration of the current upturn stood at 7.5 months.

They also pointed out how Turkey's macroeconomic backdrop appeared to be "healthy", the greater stability in its currency the lira, superior earnings revisions, profitability and "superior" margins relative to global emerging markets as a broad category and the fact that valuations, growth and relatively low fund exposure are supportive.

On the basis of assumptions such as US dollar-lira exchange rate of 3.0 and local currency government bond yields at 7.5% then their econometric model was suggesting 12% potential upside when measured in US dollars.

However, they were cognisant of the short-term political risks, including the possible ouster of Mehmet Şimşek, the deputy prime minister (Finance Minister between 2009 and 2015) or the possible calling of a referendum or early elections by the AK party to allow President Erdogan to tighten his grip on power.

There was also a risk of fiscal slippage under a more populist administration which would add to the market perception that Turkey's secular institutional framework was being eroded.