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by Jörg Billina, Euro on Sunday
SRecep Tayyip Erdogan ruled Turkey for 19 years. His initial zeal for reform as prime minister motivated investors to buy. Turkey-focused funds or ETFs rose sharply. But then Erdogan took over the presidency in 2014 and changed the Turkish constitution to a presidential system. He has been head of state and head of government since 2018. His increasingly authoritarian policies, in particular pressure on the currently independent central bank to cut interest rates – four times over of the past year – caused foreign investors to flee Turkish equities. The dollar-denominated iShares MSCI Turkey ETF lost about 26% despite a 9% increase in gross domestic product.
Erdogan will remain a key factor influencing the economy and the stock market until 2023. Maybe beyond. The 67-year-old wants to win the legislative and presidential elections, which will take place next June at the latest.
We can currently wonder if he will obtain the majority of votes. The population suffers from a massive loss of purchasing power. In December, the inflation rate was 36% compared to the same month last year – the highest level in 19 years. Inflation also affects companies that focus on the domestic market. Servicing debts taken out in dollars or euros is becoming more and more difficult. Export-oriented companies, on the other hand, benefit. They are listed in the BIST 100 index. The stock market barometer rose 37% last year. Turkish investors used the stock market as an inflation adjustment.
It threatens to be dramatic. Istanbul analyst firm Spinn Consulting no longer rules out a price increase of up to 50%. The country’s heavy dependence on imports and the decline of the Turkish Lira (TRY) are responsible for the devaluation of the currency. Currently, 15.07 lira must be paid for one euro. A year ago it was only 9.12 TRY.
Rate hikes would strengthen the Turkish currency. But Erdogan rejects this with reference to the Koran. Moreover, he believes that high interest rates are the real cause of inflation. On the other hand, a favorable lira rate promotes exports, reduces the trade deficit and boosts the economy, he says. Moreover, the currency will stabilize again by summer at the latest due to the increase in income from tourism. Erdogan urged citizens to keep their savings in lira and promised state compensation for further currency losses. They also have to exchange foreign currency or gold for liras. The currency and the stock market reacted positively to this. However, it is difficult to predict whether the state compensation will be sufficient to prevent the pound from falling.
In any case, Erdogan sticks to his convictions and at the same time paints a positive picture. Contrary to the West’s “capitalist logic” – by which it means interest rates – Turkey, like China, must go its own economic way. Turkey’s number 1 is certain that this will quickly lead the country to one of the ten largest economies. Turkey currently ranks 19th.
Does Erdogan’s Price and Current Currency Weakness Speak Against Entry? Not necessarily. But only investors willing to take risks should get involved and only start with small stakes initially. Turkey certainly does not lack long-term economic potential. According to Economist Intelligence, economic growth will be higher than in countries like China or Brazil in the coming years. There are also strong and well-managed companies in Turkey, such as Koc Holding or the steel group Eregli Demir Ve Celik.
Another reason pleads in favor of a commitment on the Bosphorus: if the situation were to deteriorate, Erdogan will also have to modify his interest rate policy. Or he loses the election. If a new government guarantees central bank independence, sharp price increases are to be expected.
Foreign investors cannot invest directly in Turkish stocks. Actively managed funds or ETFs are alternatives. The iShares MSCI Turkey ETF USD contains eleven stocks such as Eregli Demir Ve Celik or Koc Holding. The two financial stocks Akbank and Turkiye Garanti Bankasi are weighted at 20%. Over a five-year period, the ETF also lost 46% due to pressure on the central bank. Bold investors are betting on a gradual recovery.
Image sources: Nejdet Duzen / Shutterstock.com, SVLuma / Shutterstock.com