As I talk a great deal about adventurous stuff, its inevitable that I will regularly end up talking about damned stupid ideas: in truth there have been plenty of them though not quite as some might think !One of them is a country called Turkey.
For full disclosure I am a paid-up fan of Turkey and the Turks. I used to own a property there and still admire the country and its people, especially vibrant, bonkers, multi-cultural Istanbul. More pertinently I have always found Turkey the epitome of the advancing, emerging market. Its capitalist to the core, full of interesting businesses and a vibrant political culture that frequently veers populist (and violent) but is always vibrant and multi-polar.
And it was until a while ago fairly well run until you know who – Erdogan, now President – went off the rails and turned into a nationalist strong man. Still I find some of the criticisms of Turkey and Erdogan slightly over blown. He is a populist who is attempting to concentrate power around him, but there is solid, vociferous and powerful opposition to him even after the numerous purges. His party the AK is not as monolithic and slavish as some maintain and the business elites still have some semblance of influence – although which business elite possesses that power is a moot question.
But if you are looking for an emerging market with a strong business sector, a powerful export sector, a hectic domestic consumer sector, plus decent governance and a brilliant location betwixt the Middle East and Europe, then look no further. Unfortunately Erdogan is a menacing autocrat who is over egging nationalist claims and dragging Turkey into unnecessary disputes such as the current one with Armenia. But not all of his actions are irrational and daft (though many are). His current run ins with neighbours over oil and gas rights in the Med is not entirely unreasonable. The Greek position, especially given its far flung islands hemming in Turkey, is a tad maximalist and I can see why the Turks might want to push back aggressively. Equally the deepening web of interactions in Syria is not a daft strategic gambit. There has always been a close relationship between the two countries and it makes sense that Turkey wants to be a key player in any new strategic status quo.
Anyway, regardless of my caveats I think it fair to say that the West has turned decisively against Erdogan and institutional investors have put the country on the naughty step. Economically they are right to. Erdogan is trying to extend the school of cakeism to an extra ordinary degree. He has been trying to have his cake and eat it by pushing export led growth, increasing domestic consumption via credit expansion plus hold the line on not massively depreciating the currency and keeping real interest rates low. It is an impossible blend of outcomes and the net result resembles an oriental version of Eton mess.
The big point though is that at some stage Turkey and Turkish assets will look compelling value. Unfortunately, that juncture, that opportunity, is not now…or for the more immediate future. If anything it could get much, much worse as the Armenia/Azeri crisis intensifies and Erdogan gets to play neighbour hood bully.
The impact on the Turkish economy is already obvious, perhaps expressed most clearly in the beleaguered Turkish Lira (TRY). Renaissance’s chief economist Charlie Robertson put out a note yesterday which nicely summed up the current unfortunate position. His headline is that the Turkish Lira is now the cheapest its been for 25 years. “ The TRY is 34% undervalued to its 1995-2020 average, and at 7.84/$ is weaker today than the $7.62/$ level (in today’s money) seen in September 2018. It is the cheapest currency in MSCI EM by a significant margin…All the currency gains of the AKP first term (2002-07), when the currency appreciated very significantly in real terms, have disappeared.”
The chart below from Charlie at renaissance nicely sets the dismal context. 25 year of solid progress, down the drain!
|Figure 1: TRY in REER terms, 1995-2020|
|Source: Bruegel, Renaissance Capital|
Robertson’s prognosis of the Turkish disease is that you know who – Erdogan – has been in power for too long. Which is indisputably true though the locals have a nasty habit of voting him in to said offices. The useful Renaissance general principle is that ““political leaders who stay in power too long (beyond 10-15 years) almost all fail to move with the times, corruption becomes a bigger problem and this was concerning for our key EEMEA markets. It is a good reason to be concerned about “President for Life” Xi in China, although so far he’s only been there 7 years.”
Quite. Give Xi say another 5 or 10 years and we could see some real challenges emerge.
Robertson’s conclusion is thus: “A 5-10% bounce in the lira in REER terms is justified when the currency is this cheap (ie it may stabilise while inflation stays at double digits for the next year or so). Currencies don’t stay more than 30% cheap in REER terms, because the C/A adjusts. Nonetheless, dollar debt may be the less anxiety-inducing way to trade Turkey – but even that needs to be premised on benign global appetite for EM fixed income, rather than any assumption of a significant change in Turkish policy. Also, you have to decide to ignore a fair number of risks geopolitically: Armenia/Azerbaijan, Libya, Greece/oil exploration, Syria, PKK, EU/migrants, US sanctions risk, etc.”
Most readers won’t be able to access Turkish dollar debt – which I agree is interesting. They are basically stuck with main vehicle which is a Turkish equities ETF from iShares called the iShares MSCI Turkey UCITS ETF, ticker ITKY. This is currently trading at $11.70 and is down a whopping 33% year to date.
Recent numbers for previous years for this ETF are also not looking too hot either – here’s the last five years returns. Read and weep!
In terms of equity holdings, just 4 stocks account for nearly 50% of the value of the ETF. The biggest holding by far is a Turkish supermarket retailer called BIM BIRLESIK at 19% of the funds value followed by mobile giant Turkcell, and two local banks Turkiye Garanti Bankasi, and Akbank. Overall, the index is rather unfortunate in that it is invested 32% in financials and 21% in consumer staples.
My sense, unfortunately, is that this ETF has further to fall. I would not be surprised to see the ETF trading below $11 and even $10 a share. There is much more bad news to come in the next year but eventually even deeply unpopular stuff finds the right price and my sense is that this index tracker fund might be worth a look again at $11 and definitely at $10.
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