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Portfolio Investment in Turkey

Portfolio Investment in Turkey. Gregor Holek, Senior Fund Manager Raiffeisen Capital Management/ Emerging Markets Equities London, 4th of March 2008. Presentation Overview. The Turkish Economy (page 3-10) EU Membership and IMF Program (page11-15) The Turkish Stock Market (page 16-22)

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Portfolio Investment in Turkey

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  1. Portfolio Investment in Turkey Gregor Holek, Senior Fund Manager Raiffeisen Capital Management/ Emerging Markets Equities London, 4th of March 2008

  2. Presentation Overview • The Turkish Economy (page 3-10) • EU Membership and IMF Program (page11-15) • The Turkish Stock Market (page 16-22) • Valuation in Emerging Markets (page 23-26) • Outlook (page 27-28)

  3. The Turkish Economy

  4. The Turkish Economy • Dramatic improvements in the Turkish Economy since the Economic Crisis 2001 • Political stability, EU Convergence and IMF Program as key drivers • Strong GDP growth since 2002 • GDP growth is estimated to have decelerated to 4.5 % in 2007, driven by contraction in agriculture and slowdown in private consumption and investments 10% 8.9% 7.9% 7.4% 7.4% 6.1% 5.8% 5.2% 4.5% 5% 0% 2000 2001 2002 2003 2004 2005 2006 2007E 2008EFG -5% -7.5% -10% Source: Turkstat

  5. The Turkish Economy • Fiscal discipline • Government targets a primary surplus of 5.5% of the GNP 18% 18,00 Program-definded Primary Surplus/GNP 16% 16,00 Cent. Govt. Budget Deficit/GNP 14% 14,00 12% 12,00 10% 10,00 8% 7.0% 8,00 6.6% 6.2% 6.2% 5.5% 5.5% 6% 6,00 4.1% 4.1% 4% 4,00 3.0% 2% 2,00 0% 0,00 2000 2001 2002 2003 2004 2005 2006 2007E 2008T E: Government estimate; T: Government target Source: Turkstat

  6. The Turkish Economy • Inflation and interest rates on a downward trend since 2002 • Annual inflation rose to 8.4% by YE07 from its lowest point of 6.9% in July 2007, due to a rise in administered prices and a higher-than-anticipated increase in food prices 220 200 180 160 CONSUMER PRICE INDEX 140 INTEREST RATES 120 100 80 60 40 20 0 Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 Source: Turkstat

  7. The Turkish Economy • Breakdown of CPI, 2005-2007

  8. The Turkish Economy • Current account • CAD is unlikely to decelerate over the next couple of years • Energy bill • High dependence on FDI, Portfolio Investments

  9. The Turkish Economy • Strong FDI inflows • Increased confidence in the Turkish economy

  10. The Turkish Economy • Privatisations

  11. EU Membership & IMF Program

  12. EU Membership and IMF Program • The European Convergence Play • IMF and EU “anchors” have been largely responsible for continued improvement of the country’s macroeconomic fundamentals and its social transformation in recent years. • EU negotiations • Start of EU membership negotiations: 3rd October 2005 • 35 chapters- 6 opend and 1 closed so far • Main goal for investors is the ongoing convergence and not the final outcome of the negotiations • IMF Program • Standby agreement ends May 2008 • Banking Reform, Tax Reform, Fiscal Reform

  13. EU Membership and IMF Program Reforms - 1 AKP Election Manifesto • Reforms to continue in line with EU Convergence Program, irrespective of the pace of negotiations Real Sector: • Draft Commercial Code to be legislated — emphasis on enhancement of corporate governance, enforcement of international audit standards • SMEs’ access to funding - Revisions to legal regulations regarding credit reporting system to allow efficient sharing of information on companies’ credit history; to expedite enforcement of lien on property; to encourage M&As. • Restrictions on entry to market/bankruptcy to be eased • Social security premiums paid by employers to be reduced gradually starting with a 5pp cut in 2008 • Stamp tax & other transaction taxes to be lowered • SMEs to be supported via subsidised loans for additional employment

  14. EU Membership and IMF Program Reforms - 2 Incentive scheme: • Project based incentives focused on development of new products & technologies • Subject to clear performance criteria to measure productivity gains • Incentive scheme to be revised & regional incentives to be emphasised Competitiveness: • Privatisation - All public sector banks to be privatised, starting with Halkbank • Micro reforms to be adopted to enhance competitiveness Labour Market Reform: • Flexible employment formats to be developed

  15. EU Membership and IMF Program Reforms - 3 Educational reform: • Increased emphasis on vocational high schools • Skill transformation programs Fiscal policy: • Fiscal Rule to replace IMF stand-by performance criteria • Increased transparency in fiscal reports • Fiscal discipline to be cont’d • Wage & salary hikes not to remain below inflation Monetary Policy: • Inflation targeting & CBT independence to be cont’d • Low single digit inflation • Floating ER regime to be con’d

  16. The Turkish Stock Market

  17. The Turkish Stock Market • Indizes: ISE100, ISE30, MSCI Turkey • Market Cap ISE 100: 200 bn USD of which around one third is floating • Foreign ownership: 72 % of free float • Av. daily trading volume 2007: 1.2 bn USD MSCI Turkey Source: MSCI, Feb. 2008

  18. The Turkish Stock Market 240 Total Return (rebased, EUR) 220 66.5 % 18.5 % p.a. MSCI Turkey net dividend reinvested (USD): MSCI EM Eastern Europe (USD): 91.4 % 24.2 % p.a. 200 180 160 140 120 100 80 May 07 Mar 06 Oct 06 Feb 05 Sep 05 Nov 07 Source: ITIS, data as at 22/02/2008

  19. The Turkish Stock Market Source: Bloomberg

  20. The Turkish Stock Market Source: MSCI, Feb. 2008

  21. The Turkish Stock Market

  22. The Turkish Stock Market Source: RCM, data as at 04/02/2008

  23. Valuation in Emerging Markets

  24. Valuation in Emerging Markets • Risk Free Rate in Emerging Markets • EM market government debt is • Not risk free (below investment grade) • Traded in illiquid markets • Often denominated in mayor crncy like the USD • Estimate the risk free rate by adding the inflation differential between the local market and the US to the US Treasury 10-year-yield • Risk free rate = 10-year U.S gov. Bond yield + (local inflation – US inflation) • Price target in local crncy

  25. Valuation in Emerging Markets • Country Risks can also be captured by adjusting the cash flows in a scenario analysis rather than including them in the discount rate • Widely used approach • As cash flows are measured in foreign crncy long term exchange rate estimates are needed to derive local crncy price targets.

  26. Valuation in Emerging Markets

  27. Outlook

  28. Outlook • The prolonged rate cut cycle due to high real rates will lead to strong domestic consumption • Privatizations in the energy, telecom and banking sector will be positive for the stock market • Global slowdown have muted effect on Turkish economy due to strong domestic dynamics • Risks: Turkey is historically sensitive to global risk appetite, we thus expect a positive but volatile performance for 2008. We also see inflation risk due to rising food & oil prices.

  29. Disclaimer This document was prepared and edited by Raiffeisen Kapitalanlage-Gesellschaft m.b.H., Vienna, Austria (“Raiffeisen Capital Management” or “Raiffeisen KAG“). Despite careful research, the statements contained herein are intended as non-binding information for our customers and are based on the knowledge of the staff responsible for preparing these materials as of the time of preparation and are subject to change by Raiffeisen KAG at any time without further notice. Raiffeisen KAG assumes no liability whatsoever in relation to this document or verbal presentations based on such, in particular with regard to the timeliness or completeness of the information presented and the sources of information, or in respect of the accuracy of the forecasts presented herein. Similarly, any forecasts or simulations of earlier fund performance presented in this document do not provide a reliable indication of future performance. It is furthermore noted that the return on foreign currency products may rise or fall due to exchange rate developments. This document is neither an offer, nor a recommendation to buy or sell, nor an investment analysis. The contents of this document are not intended for use in lieu of professional consultation and advice on making specific investments. Specific investments should only be undertaken following professional consultation. It is expressly noted that securities transactions can involve significant risks and that taxation of such depends on personal circumstances and is subject to change in the future. Past performance is not a reliable indicator of the future development of an investment fund or portfolio. Raiffeisen KAG calculates performance of investment funds in accordance with the methodology of the Austrian Control Bank ‘OeKB’, based on the data of the depository bank. Issue and repurchase fees are not included. Development of funds is stated in percent (excluding fees), taking into account reinvestment of dividends. The current version of the prospectus on the investment funds described in this document, including all of the amendments since its original publication, is available at www.rcm.at/eng. Reproduction of the information or data, in particular the use of texts, text sections or graphic material from this document requires the prior written consent of Raiffeisen KAG. Raiffeisen Zentralbank Österreich AG, RZB Austria London Branch, 10 King William Street, London EC4N 7TW Authorised by the Austrian Financial Market Authority and by the Financial Services Authority; regulated by the Financial Services Authority for the conduct of UK business

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