Turkey's "unorthodox" monetary policy is not going to do the country's stock prices any favours, say analysts at Citigroup.
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Citi yesterday cut Turkish stocks to "underweight" from "neutral" and cited concern about the country's widening current-account deficit - when a country's total imports are greater than its total exports.
"The central bank's unorthodox monetary policy seems to be compounding the risk of overheating," the Citigroup analysts Andrew Howell and Maria Gratsova said in a report to investors.
This is leading to an economy "particularly vulnerable to any confidence reversal", they said, adding Turkish assets did not appear to be priced for these risks.
Turkey's central bank is keeping interest rates at a record low while lifting banks' reserve requirements to try to curb borrowing that has fuelled a boom in imports.
Bank loans continued to grow at more than an annualised 35 per cent last month, while the current-account deficit has widened for 14 consecutive months.
Ratings agencies regularly cite the imbalance as a reason for keeping fast-growing and fiscally disciplined Turkey below investment grade. The Turkish government's "underlying fiscal position is considerably more expansionary than appears at first glance, which is ill-suited to the high and rising current account deficit", the Citi analysts said.
Yapi Kredi Bankasi, a Turkish lender part-owned by the Italian bank UniCredit, was also removed from a "preferred stocks" list for the region, Citigroup said.
Turkish stocks have underperformed most other countries in central and eastern Europe, the Middle East and Africa since last October, although they have enjoyed a rebound since March.
Also yesterday, Citi said investors should add to Russian stocks, as they were the most "attractively valued in emerging markets".
In Russia, Citigroup recommended holding large-cap stocks in energy and mining, and to be "selective" in steel company investments. "We like the banks but are more cautious on consumer, telecoms and utilities," the lender said. The main ISE National 100 index yesterday closed flat at 68,212.37 in Istanbul, while Russia's Micex Index gained 2.2 per cent to 1,681.01.