beyondbrics

Turkish equities keep bursting through the ceiling. Last week, the Istanbul Stock Exchange’s main index passed 70,000 for the first time, hitting record highs on three consecutive days – and it has held steady this week.

The ISE100 has now gained around 30 per cent since the end of 2009, outperforming other emerging markets. Over the last three months, Turkey has had the world’s strongest equity market. Bond yields are close to record lows, and the lira only slipped this week from two year highs against the dollar.

One succinct summary of the reasons for all this, from analysts at the brokerage EFG Istanbul Securities, runs:

A successful referendum, strengthening the possibility of a single party government in the upcoming elections; impressive details of the medium term economic programme; tamed core inflation combined with low interest rates and decent growth; and massive inflows into TR equities/bonds.

Durmus Yilmaz, central bank governor, painted an even more positive picture in an address to business leaders last week. According to slides on the central bank’s website, he said that the recovery showed no signs of overheating, that the bank had taken precautions against a flood of money into emerging markets, and that interest rates were to remain low for the foreseeable future.

Turkish companies seem prepared to trust in market buoyancy (see graph). The last decade saw a drought of IPOs, but now a stream of companies are looking to float.

This week, the Torunlar group’s real estate investment trust (Reit) – invested mainly in shopping malls – is set to become the country’s biggest listed Reit, after raising 411.4m TL ($289m) in the sale of a 25-per-cent stake.

With more applications pending, fifteen companies have already listed this year, including several Reits, and groups from the logistics, food and media sectors.

But the biggest offerings have had a tentative reception from international investors. Koza Altin, the gold miner, ended up selling mostly to domestic retail investors, while the construction and concessions group Akfen and energy group Aksa both scaled back plans and floated initial stakes of less than 10 per cent.

Those IPOs all took place last spring in shaky market conditions. But it is less obvious why the Torunlar Reit, which completed book building during last week’s market surge, did not attract more outside investment. International institutions bought only 5 per cent of the shares offered, rather than the majority as the company had intended.

The uncertain debuts of new entrants is in contrast with the exuberance that equity analysts still see in the overall market.

Analysts at the local brokerage Ata Invest warn that in the short term, Turkey – like other emerging markets – could suffer asset price bubbles if the US embarks on another round of quantative easing. But they also argue that, despite record prices, valuations of Turkish assets remain lower than in other emerging markets.

Ali Riza Incekara, a strategist at BGC Partners, reached similar conclusions in a note published at the start of October, saying Turkish equities were then trading at 10 times 2011 earnings, an 11 per cent discount to emerging markets peers. His advice: “Stay invested and enjoy the ride.”