JP Morgan - CEEMEA Strategy - Eyes on the Prize in Turkey

We expect further nearterm downside driven by Fed tapering and EM FX worries, but Turkey remains our favorite long-term story in CEEMEA driven by: solid companies, young demographics, long-term economic growth and upside to European recovery. Our favorite long-term big cap stories are: strong consumer franchises such as Turkcell, BIMAS or CocaCola Icecek, sustainably profitable banks such as Halkbank, Yapi Kredi, Garanti and diversified holding companies: Koç Holding whose

daughter companies are c 10% of Turkey exports and Sabanci Holding.

 

The key negatives investors discuss with us are: Fed tapering; Turkey’s too large current account deficit (CAD); EM bond outflows; and uncertain monetary policy. They also mention Syria, domestic politics, central bank policy and the rising oil price. We expect these negatives to keep Turkish markets under pressure in the nearterm at least until we see fears of Fed tapering ebb. We sympathize with skeptical investors who expect a slightly lower medium-term growth outlook if the cyclical nature of Fed tapering becomes a structural reduction in global capital flows.

· Turkey’s key long-term positives are: 1) profitable companies where ROE’s have been consistently higher than EM; 2) demographics where no country’s population in the world is bigger and richer and faster growing than Turkey’s; 3) a long track record of GDP growth (5th fastest major EM at 5.3% CAGR GDP 2002-14 JPMe); and 4) strong upside to the European recovery where 40% of Turkey’s exports go

(used to be 58%).