The Istanbul stockmarket fell sharply in August, undermined by a weaker currency with the lira falling by more than 5% against the US dollar over the month. This weakness stems from the global concern that as the US Federal Reserve becomes less accommodative in its monetary policy, and begins to taper its assistance to financial markets, countries such as Turkey that may have been beneficiaries of easy money may now find it harder to finance current account deficits that are significant in relation to the size of their economies. Although the central bank of Turkey raised its overnight lending rate for the second month in the row in August, financial markets also remain skeptical that monetary policy is entirely independent of government interference ahead of municipal elections due in 2014 and such concerns may have contributed to downward pressure on the lira. In the absence of any significant domestic newsflow, this led to widespread and indiscriminate share price falls with movements tending to be exaggerated by seasonally low trading volumes.
Even those companies with significant foreign earnings that should in theory benefit from a weaker currency suffered marked share price falls with, for example, airports operator TAV down 13%, white goods manufacturer Arcelik 24% lower, and car manufacturer and distributor Tofas off 22%. These are all significant holdings within the Fund, which underperformed the underlying market as a result. The sell-off in Tofas may also have been partly driven by unwarranted fears surrounding the end of take-or-pay contracts over the coming years as well as the outlook for domestic car demand. These take-or-pay contracts effectively guarantee sales into the European market and with demand in Europe now beginning to pick up there seems little reason to doubt that Tofas will not be able to negotiate further such contracts, as they did during the 2008-10 crisis. In the unlikely event that some take-or-pay contracts are lost, these should easily be replaced with straight sales. The latest numbers also s how car sales in Turkey 12% higher over the 12 months to August, suggesting that demand here remains robust. Given the near-term certainty provided by take-or-pay contracts, a high dividend payout, a solid balance sheet and an attractive valuation relative to its peers, Tofas remains a key holding within the portfolio.
