By Craig Mellow, Barron’s
Like a stolid old horse under a drunken cowboy, Turkey’s economy maintains its footing despite President Recep Erdogan.
The 67-year-old leader may be losing his grip after 18 years in power. But he can still wreak plenty of havoc as he clings to the saddle.
“Turkish companies are among the best run in emerging markets, if they weren’t held back by the macro environment,” says Jacob Grapengiesser, a partner at East Capital.
Erdogan faces re-election by June 2023 with approval ratings at a six-year low, around 40%. He previewed his comeback strategy on Oct. 21, when his handpicked central bank cut interest rates by 2 percentage points to 16%, despite inflation nearing 20% a year.
While nominally pro-growth, the cut cemented the cardinal sin of monetary policy—a negative real interest rate. The Turkish lira slumped accordingly. It has lost a third of its value against the dollar since the pandemic started.
This sort of “unorthodox” policy has made Turkey one of the world’s worst markets. The iShares MSCI Turkey exchange-traded fund (ticker: TUR) has lost 44% over the past five years.
Dramatic rallies have interrupted the horror show, though. The last came in mid-2018, when authorities reversed course to tighten rates, and stocks jumped by a third in four months.
Investors aren’t holding their breath for a repeat. Erdogan has replaced professionals at the central bank with yes men since then.
External conditions are more hostile too, with punishing prices for Turkey’s energy imports and Covid-19 still depressing tourism.
“We see global inflationary pressures continuing for most of 2022,” says Aaron Hurd, senior currency portfolio manager at State Street Global Advisors. “In 2018 you had underlying deflation.”
Those well-run companies are still afloat, though, with shares going cheap. “We have been living in this sort of volatile environment for the past 20 or 30 years,” says Haydar Acun, managing partner at Marmara Capital Asset Management in Istanbul.
Turkey’s commercial banks are surprisingly strong, thanks partly to reforms from Erdogan’s better, earlier days. Capitalization is solid, short-term foreign debt near zero, and about 60% of deposits are in hard currency.
Grapengiesser favors Turkiye Garanti Bankasi (GARAN.Turkey), which trades at a forward price/earnings ratio around 3. “If things stabilize, you could see 30% to 40% upside,” he says.
Acun, who runs a long-only Turkish stock mutual fund, has airports operator TAV Havalimanlari Holding (TAVHL.Turkey) as one of his biggest bets. Aside from the tourist revival play, it reaps currency from airports in seven foreign countries, from Saudi Arabia to Croatia.
The lira is also “pricing in a lot of the bad news,” Hurd says. If only there weren’t 20 more months until the election. (Erdogan can call it earlier if he sees a popularity bump.)
Acun looks forward to a lucrative post-Erdogan era. “Our recovery will be very fast once elections are called,” he says. “All the polls show that everyone is unhappy with the current situation.”
Global investors are more inclined to believe it when they see it. Inflation’s ravages on his electorate might force Erdogan back to tightening next year, igniting a new market surge, says Cathy Hepworth, co-head of emerging market debt at PGIM Fixed Income.
Or it might not.
“Turkey is a market you have to keep your eye on,” she says. “But the valuations aren’t there yet.”
