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BGC Partners Istanbul

TURKISH EQUITIES Economy & Strategy Update September 2012.

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BGC Partners Istanbul

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  1. TURKISH EQUITIES Economy & Strategy Update September2012 This document is produced by BGC Partners Menkul Degerler A.S. (“BGC”). Although information contained herein has been obtained from sources believed to be reliable, BGC does not guarantee its accuracy, completeness or reliability. Opinions and estimates may be withdrawn without prior notice. Calculations and valuations contained herein are intended as a basis for discussion. You hereby agree to carry out your own independent appraisal of the relevance and suitability of recommended transactions to your own specific needs, especially with regard to legal, financial and tax matters. Our analysis shall not be construed as an offer or solicitation to subscribe, sell, or lend securities or any other financial instrument and it is not intended to be the basis of any investment decision. BGC or its affiliates may hold buy and sell positions on any of the securities or financial instruments referred to herein. BGC may perform other services (including acting as inter-dealer broker or adviser) in relation to any of the companies referred to herein. BGC makes no representation and gives no warranty as to the accuracy or completeness of the contents of this report. BGC, its officers, employees and affiliates shall not be liable to any person in any way whatsoever for any losses, costs or claims howsoever arising from any inaccuracies or omissions in the information contained in this report or any reliance upon this report. This report may not be distributed to or passed on to anyone who is not a client of BGC. BGC Partners Istanbul 1

  2. Overview • We expect Turkish economy to grow by 2.8% in 2012 after growing by 8.5% in 2011 and 9.2% in 2010.Our 2013 GDP growth forecast stands at 5.5%. New investment incentive scheme of the Government will certainly support growth in the medium-term. • After the easing we expect CBT to remain (more or less) on hold and maintain its relatively cautious stance throughout 4Q12to tackle inflation and currency. • Ongoing foreign capital inflows on the back of positive global mood strengthened CBT’s hand. The Bank appears to be happy with the level of TL, but any global reversal is still problematic for Turkey, as FX reserves are still limited and the country runs large imbalances. • Current account deficit worries alleviatedin 2012 to some extent given the expected slowdown in economic activity, while inflation remains relatively high. • Following a muted performance in 2011, we expect a 14% earnings growth in 2012. • Turkish equities currently trade at 8.8xon 12E and 7.8x 13E earnings - about 12% discount to its 5-year historical average. • While global liquidity and stabilization in TL support the current momentum in Turkish equities, Eurozone debt problems and rising oil price pose risks over the coming months. Our 12-month target for ISE-100 currently stands at 72k. BGC Partners Istanbul 2

  3. 2013 growth catalysts • Exports • Lower interest rates • Favorable base • Political agenda • New investment incentive scheme 2013 growth blockers • C/A deficit • Household debt to disposable income • Loan to deposit ratio • Terrorism • New package for savings BGC Partners Istanbul 3

  4. EU break-up!!! BGC Partners Istanbul 4

  5. Recovery after Arab Spring BGC Partners Istanbul 5

  6. Thank you, Muslim brothers! BGC Partners Istanbul 6

  7. Lower interest rates BGC Partners Istanbul 7

  8. Favorable base BGC Partners Istanbul 8 8

  9. Possible shifts in election dates could change the whole macro outlook BGC Partners Istanbul 9 9

  10. Comprehensive Investment Incentive Package • Three pillars • Regional • Large Investments • Strategic • Investments will be supported via • Reduction in corporate tax and VAT • Social security and income tax subsidy • Interest expense subsidy • Sectors with priority • Mining • Railways, maritime • Selective tourism • Selective Defense, Pharmaceutical • Iron ore, lignite coal • Shipyard • Strategic sector definition • C/A supportive • More than 50% is imported intermediate goods • Investment size is larger than TL50mn • Impact on listed companies • Primary and potential beneficiaries include • Koza Gold • Bagfas • Kardemir • But also • Tupras • Park Elektrik • TAV • Ford Otosan • Tofas • Trakya Cam • We estimate the overall impact to be at around 6% of pre-tax earnings BGC Partners Istanbul 10

  11. Improvement in the C/A could end by year-end BGC Partners Istanbul 11

  12. Financing of the deficit still relies on short-term capital BGC Partners Istanbul 12

  13. Household debt is rising BGC Partners Istanbul 13

  14. Savings Support Package • Private Pension Funds • 25% additional state support • 15% after 3 years, 35% after 6 years, 60% after 10 years • Exit- tax will be based on return rather than contributions • We project pension funds to post a CAGR of 28%, reaching TL 135bn (US$75bn) in 2020 • Long term deposit • Withholding tax will be reduced • Longer maturity => lower withholding tax • Revenue Sharing Certificates • Legislation will include Islamic instruments to attract a wider audience • Portfolio Management Companies • New Capital Markets Law • Equity funds • Withholding tax abolished • Venture capital • Individual andf corporate tax advantages BGC Partners Istanbul 14

  15. INFLATION 1- Food inflation declined, but structural problems in the sector prevail 2- Deteriorated budget balances could trigger revenue-enhancing measures 3- High level ofenergy and non-energy commodity prices 4- Depreciated TL 5- Floods and snow storms in the country 6- Pending natural gas and electricity price increases BGC Partners Istanbul 15

  16. Annual CPI inflation is still at 9% as of end-August BGC Partners Istanbul 16 16

  17. Some advantages on the inflation front BGC Partners Istanbul 17 17

  18. CBT actions BGC Partners Istanbul 18 18

  19. Macro Forecasts BGC Partners Istanbul 19

  20. Medium-term Economic Program & 2012 borrowing BGC Partners Istanbul 20 20

  21. Problems in the budget -1- BGC Partners Istanbul 21 21

  22. Problems in the budget -2- BGC Partners Istanbul 22 22

  23. Problems in the budget -3- BGC Partners Istanbul 23 23

  24. Problems in the budget -4- BGC Partners Istanbul 24 24

  25. Solution to budget 1- GROWTH SHOULD ACCELERATE FOR HIGHER REVENUES: Budget revenues in Turkey are too dependent on economic growth. Whenever Turkey slows down, budget revenues are affected negatively. So, for 2013 growth has to accelerate for budget revenues to recover. 2- IMPACT OF ONE-OFF REVENUES IS ALMOST OVER/LIMITED: The Government introduced a restructuring of overdue tax payments (contributed a lot in 2011), paid military service (applications were slightly lower) and sale of previously forested land (contribute in late 2012 and 2013). These one-off revenues were either spent or will be spent for helping war veterans and funding urban transformation projects. 3- PRIVATIZATION COULD ACCELERATE: Another one-off and efficient revenue generation tool for the Government is still privatization. We might see a more active Privatization Administration in the coming period. 4- MAJORITY OF EXPENDITURES ARE ABOUT TO BECOME NON-DISCRETIONARY: The details of the expenditures hint that majority of expenditure items are almost compulsory or about to become compulsory. 5- A SCT INCREASE LOOKS MORE LIKELY: Rather than an austerity measure we believe that because of domestic politics and current nature of expenditures, the Government could introduce a revenue-enhancing measure in order to improve budget balances.Except the SCT we do not think that the Government will consider increasing other taxes. Among SCT options, we think a tobacco and liquor tax increase looks more likely. 6- THE TIMING OF A TAX ADJUSTMENT COULD BE OCTOBER: We know that the Government will aim to restore budget balances in 2013. However, a 2013-related budget action should be taken in 4Q12, in our view. October 2012 might be a good timing because of two reasons: a) In October, the Government will introduce the 2013 budget and revised Medium-term Economic Program, b) Last year in October we had several administrative price increases and because of that monthly CPI inflation was 3.3%. Consequently, a tax adjustment in October 2012, will not increase annual CPI inflation, but limit the decline. • 7- EVEN IF BUDGET DETERIORATES FURTHER, THIS WILL NOT BE THE END OF THE WORLD: We revised up our 2012 budget deficit to GDP forecast from 1.9% to 2.6% in parallel to the deterioration in the budget against the Government’s target of 1.5%. Compared to the fiscal situation in many European countries even this deterioration will not be the end of the world. We know that the Ministry of Finance is doing its best to broaden the tax base and increase tax revenues, but an additional measure could bolster fiscal discipline, in our view. BGC Partners Istanbul 25 25

  26. Turkey vs EM peers BGC Partners Istanbul

  27. Turkey vs EM peers BGC Partners Istanbul

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