One of the key market themes that marked this year has been the bank stocks trading with low multiples and the advancement in the industrials. Time and time again we uttered that the golden age of Turkish banking is over (see here and here) which was finally embraced by a top banker in Turkey. Given the banks capturing a dominant share of the Turkish stock market the BIST 100 index has expectedly performed poorly.
We also have seen the ratio of the Turkish banking index (BIST:XBANK) to industrials index (BIST:XUSIN) falling below 2 this year which may have seemed like an anomaly from a historical perspective. A part of analysts attributed this to the start of a bear market while the other part mentioned a changing overall market trend. Despite the fact that I have been long-term bear and clearly recommended investors to avoid from risky Turkish assets (and EM in general), I also believe the upheaval in Turkish market has begun forcing investor to be extremely selective to be able to make a winning pick.
Interestingly, according to volume data the dominance of the banks are likely to continue. This may require the fund managers moving to a set of unconventional investment strategies such as smart-beta from typical index investing as hoping and holding bank stocks leave investors face a potential long-term bear market.
It recently has been with full of ups and downs in almost all financial markets. Dips and spikes certainly should have thrown many investors for a loop. As expected it has been the same in Turkish markets. After hitting the top over 80,000 at the end of August, the benchmark stock index fell by roughly 6%. During this period the index has experienced mini-rallies and some downfalls which has not able to last more than two trading days. This makes being selective unavoidable for investors. At this stage analyzing industrial indicators based on their returns with the consideration of the changes in volatility would be a useful tool to decide where the cash should been poured into.
The chart above presenting the year-to-date returns by industries includes two important eye catchers. First, metals have been considerably profitable investments since the beginning of the year. Second, as of mid-August miners began to see a huge drop in their market caps. Two mentioned industries have gone separate ways while others have performed in line with the market.
As discussed above, the beginning of September was a turnaround in the markets. We saw %8 pick-up in the volatility of the daily returns of Turkish stocks in September compared to previous month. In the meantime some significant industry-specific trends were to show up as seen in the following chart
Due to its horrible track record, miners are not featured on the chart with 0.8% of net change in volatility and -21.5% of return for the 32 trading days starting on September 1 and ending on October 17. Based on the results, only energy, textiles and metals appear to be investments that are in green territory at the end of the period while REITs are the worst performer. On the other hand the deviations in energy stocks that is dramatically larger make the industry not a blanket buy. Additionally, despite its poor performance, we have seen retails stocks drawing a clear picture with lower volatility. Eventually, according to these results, metals, textiles and retails seems to be offering the less risky returns. Below is the list of stocks in mentioned business listed among top 100 companies in Borsa Istanbul.
- Metals: Borusan Mannesmann Boru Sanayi ve Ticaret AS (BRSAN) Eregli Demir ve Celik Fabrikalari TAS (EREGL), Izmir Demir Celik Sanayi AS (IZMDC), Kardemir Karabuk Demir Celik Sanayi ve Ticaret AS (KRDMD).
- Textiles: Menderes Tekstil Sanayi ve Ticaret AS (MNDRS).
- Retails: BIM Birlesik Magazalar AS (BIMAS), Bizim Toptan Satis Magazalari AS (BIZIM), Dogus Otomotiv Servis ve Ticaret AS (DOAS), Tesco Kipa Kitle Pazarlama Ticaret ve Gida Sanayi AS (KIPA), Migros Ticaret AS (MGROS), Teknosa Ic Ve Dis Ticaret AS (TKNSA).