Turkish Equities: 2023 Strategy Report: Investment Strategies in Turkey amidst Global Recession (Gedik Yatırım)

An Overview - Macro Outlook
 
 
«Recession» will remain as the main theme of 2023 in global markets
 
• We assume that the Brent oil price will fluctuate between $80-100/bbl throughout the year (we assume that price levels outside this range will not be sustainable). We also anticipate that gas cuts from Russia to Europe will continue, causing the TTF spot gas price to remain well above historical averages.
• There are actually various factors that would be supportive of disinflation in the U.S. over the short-term, potential supply chain disruptions (as we expect China to stick to zero-Covid policy at least until next summer) and the upside risks in energy prices due to geopolitical risks may limit the decline in inflation. We project that CPI inflation in the U.S. would decline to around 3.0-3.5% by the end of 2023, while the annual average would be around 4.5%. After raising the policy rate to 5.0% in 1Q23, we expect the FED to keep it at this level until the end of the year. The FED may start rate cuts gradually by end-2023/early 2024.
• Although the employment market remains fairly strong, many leading indicators actually imply that the probability of the US economy entering a recession in 2023 is quite strong. While we expect the US economy to enter a recession in 2023 (possibly by the end of 1Q23 or in 2Q23), we anticipate that it will be mild and short-lived.
• We believe that the possibility of a recession may continue to be priced in positively for the stock market for a while more. Yet, we would actually expect a sharp pullback in US equities as signs of a recession becomes more concrete and earnings expectations are downgraded. Accordingly, we think that the S&P-500 index may test new lows and there may be about a 10-15% down potential from current levels of ~3,813 based on historical trends. Yet, we may also expect a quick recovery in the S&P-500 in the latter parts of 2023, as past experience suggests that the recovery process from the bottom levels starts long before the end of the recessions.
• We also think that the potential deterioration in the risk appetite may lead to a strengthening in the USD with the safe-haven perception and bring the EUR/USD back to below 1.00 levels. Yet, as we expect the recession in the U.S. to be short-lived, we envisage that risk appetite would recover in the latter parts of the year, leading to a resurgence in the EUR/USD rate to 1.05-1.10 range.
 
Maintaining growth will remain the priority, which could increase tension on the currency
 
• We believe that the CBRT would stick to its current policy stance in which interest rates would remain depressed, while aiming to limit loan growth with macroprudential measures in order to curb the potential depreciation pressure in TL.
• Despite the deceleration in loan rates recently, we have not observed a considerable acceleration in loan growth momentum, which we believe has helped the recent stability in TL. We believe that the government might opt to induce domestic demand through some form of a credit expansion, in addition to a planned fiscal expansion. This might actually revive domestic demand in 1Q23. Yet, we would not expect the robustness in domestic demand to be maintained throughout the whole of 2023 as a result of the ongoing erosion in consumers’ purchasing power. This, combined with an expected further slowdown in exports, compels us to expect a slowdown in GDP growth in 2023 to 2.0-2.5% levels from 5.0% in 2022..
• Although we expect the stability in TL to be maintained in the short-term, a combined fiscal and monetary expansion may lead to an intensification of the TL sell-off in the upcoming period We project (assume) a USD/TL rate of 24.50 for end-2023 with a year average of 22.70.
• With the assumption of a limited TL depreciation, we would expect CPI inflation to decelerate to about 67.5% at end-2022, about 50%ish levels at end of 1Q22, and probably to levels around 45% by 2Q22. Yet, we also believe that the risks of a sudden TL sell-off remain intact, which might put some upward pressure on these estimates. We currently project end-2023 CPI inflation at 40.0% with a year average of 47%.
• C/A deficit is likely to keep rising until 2Q23; we expect C/A deficit to rise to USD49bn (5.6% of GDP) by end-2022 and to USD55bn by 2Q23. Yet, the expected deceleration in energy import costs combined with strong tourism revenues may lead to some deceleration towards the end of 2023 to USD40bn (4.1% of GDP) levels.
• Although we expect a record-high budget deficit of about TL350-400bn in December, the year-end budget deficit figure would point to 2.7% of GDP, below the government’s 3.5% limit. That said, we believe that a budget deficit/GDP ratio heading towards 4.0% or above still remains as a considerable risk for the accompanying years, particularly due to the rising interest expenditures and potentially significant FX-protected deposit scheme-related expenses.
  
 
An Overview - Equity Outlook
 
 
Valuations and the earnings trend signal saturation point for the equity market.
 
• Despite the BIST-100 was up by 26% in 2021, it underperformed the GEM’s by the same amount (in USD terms) due to the weakness of the Lira.
• So far this year, the BIST-100 returned 153% which is way above the 62.4% reported YTD CPI and 33% gain of the USD against the Lira. In our view, the key reasons of the strong real return were: 1. The absence of alterative investment options given low interest rates in an inflationary environment, whereas deposit rates still hover in the mid 20s. 2. Higher commodity prices and the weak lira helped the operating performances of the exporters in H122, and (3) Decent local demand along with substantial product price increases also helped firms’ operating margins and to double their earnings. Consequently, during the same period, the BIST-100 had also outperformed the GEMs (in USD terms) by an all time record of %139.
• In terms of our estimates and comparable multiples (adjusted for inflation) the following is what we observe: Global (peer country) 2 year average earnings growth expectations appears to have been slowed down massively, with most of them falling into negative territory. Within this context, the consensus expects Turkey to post a real negative 10% 2 year average earnings path (Our estimate: -25%), which is twice rest of the GEMs expectations. In he meantime, global multiples have also contracted and this stage Turkey trades at an expected EV/EBITDA discount of 25% versus 31% 3 months ago.
• Raising BIST-100 target to 6,000 - upside 18%. This is raised from 4,650. Consequently, our upside is 22% for Banks and 16% for industrials, which we believe the visibility in the latter is relatively better. We use a RFR of 25% in our DCF models and cut them gradually each year based on our macro assumptions, which could create a downside risk on fair value estimates is case of a prolonged higher interest rate environment.
 
In 2023, the earnings outlook will be challenging, in our view.
 
• Within the report we provide 2 charts which compares the EBITDA and earnings growth estimates in mainstream sectors under our coverage, along with our average CPI expectations.
• Consequently, the data confirms, apart from steel and mining, how all sectors are showing the substantial real growth in 2022. On the other hand,. in 2023, sectors in which we expect real growth are limited to 3 sectors, namely, food, food retail, and barely, the cement. On a consolidated basis, our models, agerage a real earnings decline of 25% for 2023.
• Key reason for next years’ earnings decline expectations are as follows: 1. The high base effect of 2022, 2. Our expectation of increasing orthodox macro policies after the presidential elections and slower growth, 3. Slower global growth, and 4. The the relative stregth of the Lira compared to the local PPI, which could impact the margins of companies, exporters in particular.
 
Changes to our model portfolio.
 
• Switching Garanti to Akbank: This is a tactical move as we believe Akbank should report stronger quarterly earnings thanks to its CPI -indexed bond portfolio and trades on lower multiples.
• Adding Orge Enerji: In addition to the medium-term growth outlook through subway projects, which is the Company’s core business, we see strong potential in the new renewable energy segment. Although, the stock outperformed the IST 100 index by 55% YTD, we believe the new business is by far from being priced in the stock.
• Adding Tekfen Holding: We believe the weakness in the contracting segment should come to an end soon, and that the strong outlook in the fertilizer and services segment will continue in 2023. In our view, 20% YTD underperformance is creating an opportunity for investors.
 
Research
Phone: +90 212 385 4200
Fax: +90 212 283 9280
research@gedik.com
www.gedikyatirim.com.tr

 
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                               Yasal Uyarı
 
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