View more on these topics

Turkish delight

Turkey is set for bumper growth, with a new Banking Act in place and other legislation in the pipeline

A growing consumer appetite for credit in general and mortgages in particular means that the outlook for Eastern European financial services stocks is good, with the greatest potential in Russia and Turkey.

Although volatility looks inevitable, from a long-term perspective, the markets for financial services in these two countries, plus Poland, Hungary and the Czech Republic, are still relatively young and set for growth.

In economic terms, moves towards the neighbouring EU have already brought down interest rates and inflation in a number of these Eastern European countries, where living standards and consumption have started to rise to EU levels. Credit demand in these countries is picking up, with the main driver being housing loans, which in all five countries still represent only a fraction of the levels in the 15 “old” EU members.

The convergence process is most advanced in Poland, Hungary and the Czech Republic, also known as the CE3. Turkey and Russia have started covering the lags, which means they stand out in terms of investment opportunities in a region that as a whole was neglected in the rush to emerging markets over the past year.

With Eastern European economies growing at 4-7 per cent a year, consumption is on the rise and financial services companies should benefit.

We believe that, over time, stocks in Turkish financials in particular have further to go after a good run. With a new Banking Act in place and other legislation in the pipeline covering areas such as credit cards, leasing and private pensions, the market is set for bumper growth. Consumer loans, mortgages and housing-related insurance are in pole position.

Statistics show that Turkey lags the EU in terms of bank lending. Equally, income per head has a good deal of ground to make up. Further falls in inflation and interest rates and rising house prices should also whet consumer appetite for financial services.

A surge in mortgage lending is expected to fuel sales of products such as fire insurance. This should add to the appeal of the insurance sector, which can also look ahead to legislation allowing individual pension plans on top of state schemes.

Merger & acquisition activity makes Turkey and Russia stand out in Eastern Europe. Companies such as GE, Axa, HSBC and Fortis already have footholds in Turkey and the M&A moves of recent months point to an unabated appetite. Planned IPOs such as the Ziraat Bankasi and Halkbank offerings are further investment opportunities.

Risks for investors include margin pressure from the growing competition. In the Czech Republic, interest rates are low and face further pressure, which is weighing on margins. Investors in Hungarian financials should be aware of the country’s macroeconomic problems, inflationary pressure and the forint’s depreciation. Competition is an issue in Poland, where western banks have been building market share for quite a while. In Russia, oil-related wealth is feeding through into incomes and consumption but investment opportunities in the banking sector are still limited.

In Turkey, banking sector stocks have suffered in line with the wider market from volatility as carry trade conditions change and from tensions with the IMF or EU and political uncertainty. In the longer term, the fundamentals in Turkey are very favourable and despite a recent correction, the investment case is still strong.

Relative to financials in emerging markets generally, valuations in Eastern Europe are comparable but the growth potential is considerable, making setbacks a buying opportunity. Within the region, Russia and Turkey are the favourites.

The ABN Amro Asset Management Eastern Europe equity fund has a 10 per cent allocation in Turkey, with Russia capped at 25 per cent and the rest shared by the three other countries. Its biggest holding in the financials sector are in Polish bank BPK and Hungarian bank OTP.


Frontiers for Skandia platforms

Credit Suisse European Frontiers fund has been added to Skandia’s life, pension and fund supermarket platforms.

Over 75 per cent of first CTFs invested

Over 75 per cent of the first people to receive Child Trust Funds have invested them, according to figures for HM Revenue & Customs.The figures also show two thirds of all parents who have received the vouchers have invested them.Pima director general Tony Vine-Lott says: “These figures from HMRC are very positive. By carefully designating […]

This week in Pensions

What a week for pensions. Not even pictures of John Prescott playing croquet in the garden of his grace and favour home could stop pensions stories from getting top billing in the papers last week.

Turner risks cut in savings

The Government has been seen to be doing something on pension reform but they haven’t really done anything yet.

India Election Update

What a difference six months makes. Speaking in September last year, we had warned of ‘excessive pessimism’ afflicting the market’s perception of India. Since then, responsible central bank policy from the Reserve Bank of India (RBI), alongside improving global growth, has meant that India’s macro environment is strengthening quickly. The current account deficit has shrunk, inflation is falling and the government has embarked on a heavy dose of much needed fiscal consolidation. As a result, the rupee has been one of the strongest global currencies this year while the market has touched all-time highs, rallying by more than 20 per cent (GBP) since September. This begs the question: are we now in a period of ‘irrational exuberance’? Not yet.


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm