Like a flabby old horse under a drunken cowboy, the Turkish economy is holding up despite President Recep Erdogan.
The 67-year-old leader could lose his grip after 18 years in power. But he can still wreak a lot of havoc by hanging onto the saddle.
âTurkish companies are among the best managed in emerging markets, if they weren’t held back by the macro environment,â says Jacob Grapengiesser, partner at East Capital.
Erdogan risks being re-elected by June 2023 with approval rates at the lowest in six years, around 40%. He presented his comeback strategy on October 21, when his handpicked central bank cut interest rates by 2 percentage points to 16%, despite inflation close to 20% a year.
While nominally pro-growth, the cut cemented the cardinal sin of monetary policy: a negative real interest rate. The Turkish lira collapsed as a result. It has lost a third of its value against the dollar since the start of the pandemic.
This kind of “unorthodox” policy has made Turkey one of the worst markets in the world. The
iShares MSCI Turkey
exchange traded funds (ticker: TUR) have lost 44% in the past five years.
Dramatic rallies interrupted the horror show, however. The latest came in mid-2018, when authorities reversed course to tighten rates, and stocks have jumped by a third in four months.
Investors aren’t holding their breath for a repeat. Erdogan has replaced central bank professionals with yes men since then.
External conditions are also more hostile, with punitive prices for Turkey’s energy imports and Covid-19 still depressing tourism.
“We see global inflationary pressures continuing for most of 2022,” said Aaron Hurd, senior currency portfolio manager at State Street Global Advisors. “In 2018, you had underlying deflation.”
These well-run companies, however, are always afloat, their shares being cheap. âWe’ve been living in this kind of volatile environment for 20 or 30 years,â says Haydar Acun, Managing Partner of Marmara Capital Asset Management in Istanbul.
Turkish commercial banks are surprisingly strong, in part thanks to reforms in Erdogan’s early days. Capitalization is strong, short-term foreign debt close to zero, and around 60% of deposits are in hard currency.
Turkiye Guaranteed Bankasi
(GARAN.Turquie), which trades at a futures price-to-earnings ratio of around 3. âIf things stabilize, you could see a 30-40% rise,â he says.
Acun, who runs a long-term Turkish equity mutual fund, has an airport operator
TAV Havalimanlari Holding
(TAVHL.Turkey) as one of his biggest bets. In addition to the tourism stimulus game, he collects foreign currency at airports in seven foreign countries, from Saudi Arabia to Croatia.
Reading it is also “the price of a lot of bad news,” says Hurd. If only there weren’t 20 months left before the election. (Erdogan can call him sooner if he sees an increase in popularity.)
No one looks forward to a lucrative post-Erdogan era. âOur recovery will be very quick once the election is called,â he said. âAll the polls show that everyone is unhappy with the current situation. ”
Global investors are more likely to believe it when they see it. The ravages of inflation on his electorate could force Erdogan to return to tightening next year, triggering another market surge, said Cathy Hepworth, co-head of emerging market debt at PGIM Fixed Income.
Or maybe not.
âTurkey is a market you need to keep an eye on,â she says. “But the valuations are not there yet.”