Email of the day (3&4)
Comment of the Day

July 25 2011

Commentary by Eoin Treacy

Email of the day (3&4)

on Turkey & Brazil:
"Turkey continues its descent now with a low RSI. Is it oversold? Are the fundamentals and prospects still good? To what extent is it affected by the unrest in the Middle East? Should I keep my Turkey ETF?

"Brazil. Flat for a long time despite being a resource country. What are its prospects? Is it worthy of part of a diversified portfolio and part of the International Beauty Contest?"


"I have an investment in Turkey via iShares ETF (UK). You last specifically commented on Turkey in April, 2011. Why do you think the index has dropped so much recently? Is it the geopolitical situation in the area, questions over the EU and Turkey's ambitions to join the EU? The ETF is down by more but that would, I guess, be a function of currency exchange. I think the long term prospects of Turkey are still good with its large young population and geographical location. I look forward to hearing from you. Thanks for all your good work."

Eoin Treacy's view Thank you both for these questions which I'm sure will be of interest to other subscribers. These emails also help to reflect the deterioration of investor sentiment towards these countries over the last few months.

"Governance is everything" has long been a mantra at Fullermoney. Both Turkey and Brazil rallied impressively over the last decade as their respective governments burnished their inflation fighting credentials. Their respective currencies stabilized, growth picked up, unemployment fell, the middle class expanded and equity markets soared. Over the last year, and longer for Brazil, equity markets have lost uptrend consistency.

Turkey's stock market soared following the credit crisis as the economy appeared to sidestep the worst of the financial crisis. However inflationary pressures have been rising. CPI is currently 6.24% and the 1 Week Repo Rate 6.25%. Interest rates will have to be raised at some point to contain inflationary pressures and this is likely to be a headwind for the stock market.

I agree that Turkey has solid medium to long-term potential. However for this potential to be realized it will need to continue its trajectory of improvements in economic and political governance. Erdogan's talk of changes to the constitution can be viewed as a back slide in this regard. Here is a section from a Bloomberg article on June 12th, just following the election:

Erdogan's plan for a new constitution has been a central campaign issue. He argues for shifting from the current parliamentary system to a presidential one, in which he himself would be the leading candidate for the top job. CHP leader Kemal Kilicdaroglu has criticized the government for its record on poverty reduction and says Erdogan is showing an increasingly authoritarian streak.

Turkish CDS spreads have posted a progression of higher reaction lows and higher rally highs within the two-year base since November. The absolute level is still quite low at 185 but some evidence that the spread is encountering resistance in this area would be comforting for those bullish of the country's prospects.

In the last three months, the Turkish Lira has fallen faster than both the US Dollar and the Euro. It is currently somewhat overextended, particularly against the Euro but a clear downward dynamic would be required to indicate Lira demand is regaining the upper hand.

On April 8th. I identified the 60,000 area as a significant level for the National 100 Index. It has now pulled back to test that area and found at least short-term support today, rallying impressively. It will need to continue to find support in this area if the medium-term upside is to continue to be given the benefit of the doubt.

Brazil has been ranging for longer, but has a stronger currency, more stable CDS spread and still has a positive trade balance. There is some political uncertainty because Rousseff is something of an unknown quantity for investors. Petrobras' massive rights issue and the country's efforts to control the Real's rise have also acted as headwinds. However these could be transitory factors and the stock market is not expensive.

Both Brazil and Turkey need to demonstrate a continued commitment to combating inflation even if this means stifling growth for a short time and risking voter anger. If they do, the stock market should reflect this continuation of improving governance.

The Bovespa Index found at least short-term support in the region of the 2010 lows but needs to sustain a move above 64,000 to break the progression of lower highs and indicate a return to medium-term demand dominance.

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