Turkish Interest Rates

Turkey's shrinking budget deficit has been the main factor affecting interest rates. A couple of years ago sustainability of the debt was the problem. Today, we will see the budget deficit turn to a surplus and public debt stock start to decline. As a result of the tight fiscal policy real interest rates came down to 7-8% level from nearly 40% three years ago. These are local currency denominated interest rates. The interest rates for 30-year Eurobonds are at 7.1% which is only 2.5% above long-term US interest rates.

If you believe that Turkey's disinflation program will be successful, then local interest rates will go down further and keep fueling the consumption. I strongly believe that Turkish government is on the right track and in two years time we will see inflation below 5% and single digit interest rates. Turkish financial markets are not as efficient as the western markets and for this reason it has been quite easy to profit from the above analysis.

Declining interest rates will favor interest rate sensitive consumption and investments. The biggest winner will be the Turkish banking system, benefiting from both angles. The leader in this sector is Akbank (AKBNK). It is the most expensive stock in my portfolio, trading about 17 times 2005 earnings and 3.8 times the book value. My second choice is Yapi Kredi Bank (YKBNK). It used to be one of the premier banks of Turkey before the financial crises. Recently it was sold for 2.5 billion dollars to Koc Group. Current market value is 4.2 billion dollars. However, it trades around 2.6 times book value. People still have a lot of respect for Yapi Kredi name and I believe it will return to profitability under its new management. I expect it to fetch 3.5 times book value in two years. The other banks in my portfolio are Sekerbank (SKBNK), TSKB, and Fortis (FORTS). They all trade below 3 times the book value and SKBNK and TSKB has low P/E ratios. I believe they will fare better than other banks.

Real Estate market will be another winner in this environment. There are not any reliable sources tracking the real estate market. However, I heard that home values went up by 30% in 2005. Mortgage rates hoover around 12-13% annually. However, they came down from 25% a year ago. Soon, they will go below 10% and we will see another round of appreciation. Current real estate projects target the upper middle class and most of the public have not participated in this game yet. My favorite is construction companies but they are all private. There are a bunch of REITs trading at Istanbul Stock Exchange, most of them trading at a 50% premium over their NAV. I bought Is Gayrimenkul (ISGYO) 4 months ago and since then it appreciated by more than 40%. I still see it favorable but I don't think it will keep appreciating at the same rate. ISGYO trades at 1.6 times the book value.

An indirect beneficiary of real estate market is cement companies. I have Akcansa (AKCNS) in my portfolio, it is the biggest cement company in terms of market capitalization. I bought it four months ago and it appreciated by more than 70% since. This is what I am talking about. It was evident that interest rates were declining and cement prices were increasing four months ago. Yet, i was able to buy this company at such a cheap price.

I also have Marmaris Marti (MMART) in my portfolio. This is also a real estate play, this company is an unsuccessful hotel industry company in one of the nicest places in Turkey. If it goes out of business and sells its buildings it will probably fetch a price of 3 YTL per share. I bought it at 2.15 a month ago and now it trades around 2.40.

Another company is Dogus Oto (DOAS), currently it has a P/E ratio of just 10. They are the distributors of VW autos. I bought it 3 months ago and it went up by 50% since. "Analyst" think that declining interest rates will shrink the demand for cars, that's why this stock is trading at a discount. I just think the opposite, the size of this market in Turkey is still pretty small and there will be lots of people who can't afford to buy a house will instead buy a car. The declining interest rates will make car buying much more easier than buying houses.

The last company is riddled with problems. This is the first company I bought 4.5 months ago but it only appreciated by about 15%. Tupras (TUPRS) is an oil refinery company and recently sold for about 40 YTL per share. Current market price is only 25 YTL and I believe it has the potential to get to 40 in two years' time. However, there are some legal problems with the sale of the company but, I believe they will be resolved favorably.

Overall I am happy with my portfolio. I might add a couple of names soon if I see good opportunites. I will share them with you as soon as I make the transactions.