Turkey’s stock market is undervalued, while the economy that underpins its businesses is being run responsibly, according to Aziz Unan, manager of Renaissance Asset Management’s Ottoman Fund.
Western European equity markets arguably enjoy the first half of that equation, too. But it is very hard indeed to argue they enjoy the second half.
Why, in Unan’s opinion, is Turkey’s market undervalued, at a price to (2012) earnings ratio of 9.4 times?
Unan (pictured) acknowledges that, over the 15 years he has invested in emerging markets, they have become more efficient. But he adds: “Generally the sell-side is behind the curve, and cannot really generate that much alpha as a result”.
Unan describes Turkey’s market as “over-brokered, but under-researched”, with local and international analysts covering much the same stocks.
Additionally, macro-economic research on Turkey may not always be accurate – giving Unan an advantage if the proprietary models he brings to economic forecasting and equity market valuations are more accurate.
Unan calculates separately what risk-free rate he should feed into his models for the future, and he does not rely on government bond rates, or forecasts of rates from economists.
Rates on benchmark Turkish government debt was 11.5% in December, and “every economist was saying ‘do not buy into Turkish shares’, because they expected bond yields would shoot up to 12.5% or 13% by the first quarter of 2012, and buying would be better in the second quarter.”
Instead, the yields dropped to 9.2%. Turkish shares rose 18.4% in January and February in Turkish lira terms.
If Unan’s forecasts are more accurate, he will trade correctly, and earlier.
Since launching the Ucits IV compliant fund at Eastern European / Russian boutique Griffin Capital Management, Ottoman fund outperformed the MSCI Turkey Index by more than 25 percentage points.
Unan’s fund has exhibited 12-month rolling volatility of about 26% since launch. This is modestly higher than for global shares, but it compares favourably with 43% volatility for the Turkish indices, and 32% volatility of the MSCI Emerging Europe index over the same period.
Unan says volatility is also brought lower in his stock universe by the nations having underleveraged governments and households.
He notes the only time his fund meaningfully underperformed index was during the second and third quarters of 2010, when market momentum took centre stage ahead of underlying fundamentals.
Early that year he had become concerned that Turkey’s budget deficit would become a problem, and he reduced holdings there below a historic range of about 66%.