Turmoil Shouldn’t Derail Turkey
In 2012, Turkey’s stock market (as measured by the Istanbul Stock Exchange National 100 Index) rose more than 50%1, posting one of the strongest performances of any global equity market last year. However, recent news of protests sweeping the nation has started scaring off some investors, at least in the short term. We consider turmoil to often be a natural part of change and development, and these short-term political disturbances likely won’t be the last. What we try to remind investors is the importance of remaining focused on the long-term opportunity in Turkey and not be spooked by short term issues. I’ve invited my colleague Carlos von Hardenberg, Managing Director, Turkey, based in Istanbul, to share some local insight.
Carlos von Hardenberg, Managing Director, Turkey
In Turkey, what began as peaceful protests against the government’s plans to redevelop Gezi Park in Taksim Square turned into riots met by police with tear gas and water cannons, creating public uproar. This unfortunate disturbance has spread beyond the issue of the park and into political discourse, as there is a fundamental political conflict in Turkey between those who want a secular state and those who prefer an Islamic-based government. The resulting turbulence is likely to continue in the short term. While many have been quick to criticize the government, there is a large part of the population that supports Prime Minister Recep Tayyip Erdogan, who seems to now be making efforts to calm the situation by agreeing to hold discussions with protest organizers after tensions began to escalate.
The geopolitical uncertainty has caused a sharp decline in Turkish equities in recent weeks, unraveling what had been a positive start to the year. However, from a long-term point of view we remain positive on Turkey, which outperformed other emerging markets generally last year.2 Of course, past performance does not guarantee future results.
We are bullish on Turkey for a few reasons. From an economic and investment standpoint, we think the track record of the government has been outstanding, with policies conducive to attracting foreign investment there. The government has privatized public assets, and has been investing in infrastructure. Its plans include high-speed rail, a third bridge over the Bosphorus, tunnels, as well as plans to build what could be the largest airport in the world. Currently, investment sentiment in this regard remains positive.
Turkey also boasts positive fundamentals. Its GDP has increased dramatically since 2002, and its banks are generally very well capitalized and more stable than in most parts of the world, including much of Europe. Interest rates are low compared with many other emerging markets. Turkey’s central bank cut its key interest rates by 50 basis points (0.5%) in May. The one-week repurchase lending rate was reduced to a record low of 4.5%, while the overnight lending and borrowing interest rates were cut to 6.5% and 3.5%, respectively.
In addition, Turkey has developed into a very important trading partner with the EU and established a very competitive export industry that has seen vibrant growth in the past 10 years.
This year, Moody’s Investors Service became the second international ratings agency to upgrade Turkey’s credit rating to investment grade. Moody’s raised the country’s sovereign bond ratings by one level to Baa3 from Ba1, with a stable outlook. The agency cited “recent and expected future improvements in key economic and public finance metrics” and “progress on structural and institutional reforms that Moody’s expects will reduce existing vulnerabilities to shocks to international capital flows over time” as reasons for the upgrade. The recent civil disturbances in the country could undermine its economic outlook, however.
Turkey’s central bank has been able to manage the currency. Inflation has come down significantly, from as high as 120% in 1994, (as measured by the consumer price index on a year-over-year basis), to just over 6% in 2012.
Despite all of this, it is now important for the Turkish government and the prime minister to show that they are the leaders of all of Turkey to help the country return to a normal state. In our view, this can only be done by policies that support democratic principles such as freedom of speech, a free press and less government interference in the private lives of Turks. The EU accession process must continue and further reforms conducted.
Very often, we see the market over-reacting in situations such as the one we are in right now. So, as value investors, we are looking for opportunities to buy stocks where we see bargains. Some investors have reacted strongly to the unrest in Turkey, and certainly it’s not something to take lightly. But we don’t believe the current turmoil will derail the country and it hasn’t completely derailed businesses, which continue to operate there.
Of course, periods of volatility are to be expected not only in emerging markets, but all equity markets, and at times corrections can be healthy. It’s difficult to time it, but as far as Turkey is concerned, we are looking for potential buying opportunities there. Unless the situation dramatically worsens, we remain confident Turkey’s government will recognize the public’s right to be heard and continue on its path toward economic progress and growth.
1. Source: Bloomberg LP. Borsa Instanbul Stock Exchange National 100 Index, priced in local currency. Past performance is not indicative of future results. Indexes are unmanaged and one cannot directly invest in an index.
2. Source: MSCI Indexes. All MSCI data is provided “as is.” MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI. Past performance is not indicative of future results. Indexes are unmanaged. One cannot directly invest in an index.