Turkey: risk takers dip their toes into the equity market

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Turkey’s calm waters make it an attractive holiday destination. Tourists may not be aware that the country’s economy is far more turbulent. But international investors are alert to signs that President Recep Tayyip Erdoğan is finally addressing the country’s ills.

After a period of mismanagement, Erdoğan made two well-regarded appointments this summer. Mehmet Şimşek was reappointed as finance minister and former Wall Street banker Hafize Gaye Erkan was picked to lead the central bank. On Friday, he appointed three new deputy governors, continuing a shift towards economic orthodoxy.

Encouraging noises have been followed by action. Two successive rate hikes have more than doubled interest rates to 17.5 per cent. Though with inflation running near 40 per cent that still looks low. 

The Turkish stock market has rallied by about 55 per cent in local currency terms since its May lows. In dollar terms, that’s a rise of more than 14 per cent. Foreign investors have tentatively waded in, investing $1.6bn since early June.

The bull case for Turkey is clear. By rights, the country should be an economic powerhouse. It is ideally placed on the border of Europe and with 85mn people it has demographic tailwinds. World-class companies include Turkish Airlines and conglomerate Koc Holdings. Even after the recent rally, the stock market only trades at about five times forward earnings. That is among the cheapest in the world. 

If Turkey returns to economic orthodoxy, its stock index might deserve twice the current earnings multiple.

That is the theory. The practice could turn out to be very different. Erdoğan is a wild card. It is by no means clear that, in the context of a painfully slowing economy, he will remain committed to a path of rising rates. Turkey promises much. But it takes a brave investor to bet on Erdoğan’s economic instincts.