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Global Research
�� The latest valuation picture strongly
favours Turkey over Poland
�� Turkey should be a strong beneficiary of
a post-Paulson high beta bounce in EM
�� There is additionally much greater
scope for interest rate surprise
This note upgrades Turkey to Overweight and downgrades
Poland to Neutral. The Turkish banks are, as usual, the right
way to implement the call, in our view.
This is partly a valuation call. After its recent move down,
Turkey is again sitting on much more reasonable valuations,
while Poland looks more expensive.
More fundamentally, we expect a post-Paulson bounce in
high beta EM. There are two components to US economic
weakness – one is a set of structural and cyclical headwinds,
the other is the threat of a systemic financial crisis. If the
latter can be avoided, even if the structural and cyclical
headwinds remain, in our view EM high beta markets still
have scope to move sharply higher.
One key theme here is the potential for positive interest rate
surprise, which we think will be a key driver for emerging
market performance. Turkey is a disproportionate winner
from the recent fall in the oil prices. There is scope for the
yield curve to flatten, but at the same time we also expect
rate cuts to come back onto the agenda.
Equity Strategy
GEMS
Upgrade Turkey,
downgrade Poland
25 September 2008
John Lomax*
GEMs equity strategist
HSBC Bank Plc
+44 207 9923712 [email]john.lomax@hsbcib.com[/email]
Wietse Nijenhuis*
GEMs equity strategist
HSBC Bank Plc
+44 207 9923680 [email]wietse.nijenuis@hsbcib.com[/email]
Anupama Rao*
Associate, Bangalore
View HSBC Global Research at: [url]http://www.research.hsbc.com[/url]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc,
and is not registered/qualified pursuant to NYSE and/or NASD
regulations
Issuer of report: HSBC Bank plc
Disclaimer & Disclosures
This report must be read with the
disclosures and the analyst certifications
in the Disclosure appendix, and with the
Disclaimer, which forms part of it
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This note reduces our exposure to Poland (rating
downgraded from Overweight to Neutral) and
increases our Turkish weight (rating upgraded from
Neutral to Overweight). This is basically a play on a
post Paulson reduction in risk aversion. Turkey is a
high beta market, Poland a relatively defensive one.
We want to be in markets where interest rates have
scope to fall – Turkey fits the camp a lot better.
Turkey would also be a big beneficiary of falling oil
prices. At the same time valuations are substantially
better. While we find few bottom-up ideas to get
excited about in Poland, the Turkish banks have
again come back onto our radar screen.
The context to this move is that Turkey has been a
much bigger loser from this year’s financial stress
than Poland, down 42% in USD terms since the
beginning of the year, while Poland is down 24%.
Over the past month, Turkey is off 17%, Poland
down 10%.
In terms of the inflation and interest rate outlook,
we think that Turkey is a much better prospect.
Part of the story is that it is simply a relative
winner from the recent fall in oil prices. We are
forecasting that the inflation rate will fall from the
current 11.8% to 8% by the end of next year. The
Upgrading Turkey,
downgrading Poland
�� The latest valuation picture strongly favours Turkey over Poland
�� Turkey should be a strong beneficiary of a post-Paulson high beta
bounce in EM
�� There is additionally much greater scope for interest rate surprise
PE / EPS growth rate nexus; by country
GCC x Saudi GCC Chile
Braz il
Taiw anPhilippines
Malay sia
Korea
Indonesia
India
Egy pt China
Poland
Hungary
Cz ech
Is rael
Turkey
Russia
South Africa
-10%
0%
10%
20%
30%
40%
4 5 6 7 8 9 10 11 12 13 14 15 16 17
PE (2008)
EPS growth (2009)
Mex ico
Thailand
Source: IBES, MSCI, Thomson Financial Datastream
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central bank is more optimistic – it projects 7.6%
on the basis of oil prices at USD140/bbl and 6.1%
if oil prices come down to USD100/bbl. Lower oil
prices should also help the current account deficit
which we project to fall from 6.4% of GDP to
5.8% next year.
On interest rates, short rates are currently at
17.75%, which gives a compound overnight rate
of 18.2%. This compares with a two-year yield of
19.15%. So there is still scope for the yield curve
to flatten, and at some point rate cuts should come
back onto the agenda.
It is true that future Turkish growth will be very
modest – less than 3% in H2 2008 and c3% next
year. However, the Turkish market is much more
sensitive to interest rates than to growth. This is
unlikely to stand in the way of a short-run tactical
bounce in Turkish equities.
Politics does not look a major constraint in
Turkey. The next major event on the calendar is
the local elections in March 2009 – and these are
too far away to be immediately interesting. For
the time being the tension between the AKP and
the secular camp seems to have died down.
In Poland, we think that the inflation rate has also
peaked at 5.8% of GDP. However, the decision to
join the euro stands in the way of near-term rate
cuts. If the current plan to join the euro in 2012
goes ahead, verification of the Maastricht criteria
will need to occur in 2011 based on 2010 data.
The central bank is likely to move rates a little
higher (we are pencilling in two more rate hikes)
to 6.5%, but then to keep them there until H2
2009. If you’re looking for rate-cutting stories,
Turkey looks more attractive than Poland.
On valuations, Turkey look much better
positioned than Poland. The 2008 consensus PEs
are 6.8 and 9.3, respectively. Consensus earnings
growth rates are 17.2% and 6%. Poland has the
highest PEG ratio in EMEA at 1.5, while Turkey
has one of the lowest at 0.4. Given the sluggish
growth outlook in Turkey there is clearly
downside risk to earnings projections – but we
think that this can be absorbed by the current
valuation picture. Bottom-up we find much more
to get excited about in Turkey than in Poland.
Poland PE relative to EMEA PE Turkey PE relative to EMEA PE
60
70
80
90
100
110
Jan-04
Apr-04
Jul-04
Oct -04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Mean + 2SD
Poland PE / EM EMEA PE
Mean - 2SD
60
80
100
120
140
Jan-04
Apr-04
Jul-04
Oct -04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Mean + 2SD
Turkey PE / EM EMEA PE
Mean - 2SD
Source: IBES, MSCI, Thomson Financial Datastream Source: IBES, MSCI, Thomson Financial Datastream
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Valuations
______________PE _______________ ____________ EPS growth ____________ PEG Consensus EPS
2007 2008e 2009e 2007 2008e 2009e 2008e 3M change
Czech 11.5 11.6 8.9 30.4 15.1 12.9 0.9 2.4
Hungary 8.1 7.1 7.1 -12.2 14.0 -0.5 -13.5 2.2
Poland 9.1 9.3 8.8 15.4 -2.6 6.0 1.5 -4.4
Central Europe 7.2 6.8 6.3 13.2 5.7 6.4 1.1 -1.2
Egypt 11.6 9.3 8.0 39.5 25.2 16.6 0.6 6.3
Israel 12.8 11.6 8.9 16.8 10.7 29.8 0.4 14.5
Russia 5.8 4.5 3.9 28.0 29.0 14.5 0.3 6.4
South Africa 12.2 10.6 7.9 17.8 15.5 33.9 0.3 0.6
Turkey 6.9 6.8 5.8 43.4 1.8 17.2 0.4 7.7
EMEA 7.4 6.2 5.2 19.0 19.0 19.8 0.3 1.6
China 12.0 10.6 9.1 34.3 13.3 16.6 0.6 1.0
India 17.1 14.3 11.6 11.7 19.3 23.2 0.6 2.9
Indonesia 11.5 9.9 7.7 44.2 16.3 29.0 0.3 3.7
Korea 10.5 10.1 8.8 8.2 3.5 14.8 0.7 -6.3
Malaysia 10.1 11.5 11.0 44.3 -12.6 4.9 2.3 -6.2
Philippines 12.9 12.8 11.2 -2.7 0.8 14.1 0.9 -5.4
Taiwan 9.7 12.1 10.8 22.5 -20.2 12.1 1.0 -20.6
Thailand 18.4 8.6 8.0 -44.6 114.1 7.2 1.2 1.1
Emerging Asia 10.2 9.9 8.5 8.0 3.0 15.4 0.6 -11.5
Argentina 8.1 16.3 15.0 -7.6 -50.2 8.9 1.8 -36.1
Brazil 9.3 8.1 6.8 34.4 15.5 19.3 0.4 14.6
Chile 18.5 15.7 12.8 31.9 17.7 23.0 0.7 5.1
Mexico 12.1 11.6 10.1 4.5 20.4 21.4 0.5 2.2
Peru 10.0 12.8 11.1 27.8 -21.8 n/a n/a n/a
Latin America 10.6 9.4 7.5 26.1 14.0 19.4 0.5 -1.3
GEMs 9.5 8.8 7.5 14.5 9.2 17.3 0.5 -6.2
Note: PEG is defined as the 2008 PE, divided by the 2009 EPS growth
Source: Thomson Financial Datastream, IBES
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Disclosure appendix
Analyst certification
The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject
security(ies) or issuer(s) and any other views or forecasts expressed herein accurately reflect their personal view(s) and that no
part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained
in this research report: John Lomax and Wietse Nijenhuis
Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
[url]www.hsbcnet.com/research[/url]. Details of these short-term investment opportunities can be found under the Reports section of this
website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities
Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate,
regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents
the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a
stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the
next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the
stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10
percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
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stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Prior to this, from 7 June 2005 HSBC applied a ratings structure which ranked the stocks according to their notional target
price vs current market price and then categorised (approximately) the top 40% as Overweight, the next 40% as Neutral and
the last 20% as Underweight. The performance horizon is 2 years. The notional target price was defined as the mid-point of the
analysts' valuation for a stock.
From 15 November 2004 to 7 June 2005, HSBC carried no ratings and concentrated on long-term thematic reports which
identified themes and trends in industries, but did not make a conclusion as to the investment action that potential investors
should take.
Prior to 15 November 2004, HSBC's ratings system was based upon a two-stage recommendation structure: a combination of
the analysts' view on the stock relative to its sector and the sector call relative to the market, together giving a view on the
stock relative to the market. The sector call was the responsibility of the strategy team, set in co-operation with the analysts.
For other companies, HSBC showed a recommendation relative to the market. The performance horizon was 6-12 months. The
target price was the level the stock should have traded at if the market accepted the analysts' view of the stock.
Rating distribution for long-term investment opportunities
As of 25 September 2008, the distribution of all ratings published is as follows:
Overweight (Buy) 52% (19% of these provided with Investment Banking Services)
Neutral (Hold) 33% (18% of these provided with Investment Banking Services)
Underweight (Sell) 15% (7% of these provided with Investment Banking Services)
Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues.
For disclosures in respect of any company, please see the most recently published report on that company available at
[url]www.hsbcnet.com/research[/url].
* HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1 This report is dated as at 25 September 2008.
2 All market data included in this report are dated as at close 24 September 2008, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
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price sensitive information is handled in an appropriate manner.
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Disclaimer
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Global
Kevin Gardiner
Global Sector Head
+44 20 7991 6714 [email]kevin.gardiner@hsbcib.com[/email]
Europe
Robert Parkes
+44 20 7991 6716 [email]robert.parkes@hsbcib.com[/email]
Vivek Misra
+91 80 3001 3699 [email]vivek.misra@hsbc.co.in[/email]
CEMEA
John Lomax
+44 20 7992 3712 [email]john.lomax@hsbcib.com[/email]
Asia
Garry Evans
+852 2996 6916 [email]garryevans@hsbc.com.hk[/email]
Leo Li
+852 2996 6919 [email]leofli@hsbc.com.hk[/email]
Akane Nishizaki
+81 3 5203 3943 [email]akane.nishizaki@hsbc.co.jp[/email]
Steven Sun
+852 2822 4298 [email]stevensun@hsbc.com.hk[/email]
Jacqueline Tse
+852 2996 6602 [email]jacquelinetse@hsbc.com.hk[/email]
Global Equity Strategy Research Team
