The value of any investment can fall as well as rise and investors may not get back the amount invested.

Few emerging markets command our attention like Turkey. Erdogan’s resurgence in May’s elections delighted his supporters, triggering a sharp weakening in Turkish lira forwards as the market priced in further years of erratic economic policymaking. While Turkish asset prices are undeniably volatile, we don’t find them completely unpredictable. Drawing on our experience of investing through political and economic cycles, we can still find sustainable investment opportunities in the country.

Erdogan’s political base lies with rural, conservative, Islamist voters. We believe they vote for him because he stands up for their interests, ensures Turkey’s global relevance and pursues economic growth. With this in mind, actions like his initial rejection of Sweden’s application to join NATO and his aggressive use of monetary policy to stimulate growth prior to elections all make perfect sense.

Yet while such policies of polarisation may make for a successful electoral strategy, they are not without cost. Externally, the preference for uncritical regimes in Russia and the Gulf risks weakening ties to the (much larger) Western markets in which Turkish firms have been so successful. Domestically, the social contract has been eroded as a younger, more secular generation questions its place in Erdogan’s conservative Turkey, while Kurds and refugees continue to face harassment and discrimination.

The rule of law has been weakened and the independence of key institutions such as the Central Bank has been undermined, meaning they are now more aligned with party politics rather than national interests. The resulting policy of low interest rates has driven high inflation, with the erosion of purchasing power triggering the conversion of domestic savings into gold and ‘hard’ currencies like the euro and US dollar. To maintain the lira’s stability during the run-up to elections, the Central Bank spent its foreign exchange reserves and drew on loans from Arab States in the Gulf and swap lines from China, but now the cupboard is bare.

The opportunity in Turkey

Central to our process is an assessment of sustainability – determining alignment with climate indicators and the UN Sustainable Development Goals – as we believe that countries not on a sustainable trajectory will provide poor long-term returns. Our review process scores Turkey’s government bonds at zero, given the weak governance factors identified above. We believe this damages Turkey’s creditworthiness and, therefore, will not lend to the country.

However, there are other approaches we can take to make money for clients. The lira is weakening, an opportunity we’ve captured through currency forward contracts. Furthermore, when we look at the companies that drive the Turkish economy we find some excellent businesses capable of surviving and even thriving in this turbulent environment. Turkcell, a telecom company, is adept at managing its product pricing to ensure inflation does not erode its margins. Şişecam is a highly competitive industrial glassware company deriving hard currency revenues from global markets, while Aydem enjoys a structural advantage in Turkey’s renewable energy market. All three companies have resilient balance sheets and strong growth prospects. Yet thanks to the sovereign backdrop, their dollar-denominated bonds offer double-digit yields – an interesting prospect for our clients’ portfolios.

Flexibility is crucial

Turkey offers a great example of the challenges we enjoy as emerging market bond investors. Its huge economic potential is mitigated by the complexity of its governance backdrop. Through deep knowledge and analysis, we can build investment insights to add value for our clients. We are avoiding Turkey’s government bonds, given the country’s weakening sustainability and deteriorating creditworthiness. However, our ability to invest across asset classes allows us to find other opportunities in selling the lira and buying cheap bonds issued by some of the country’s strongest businesses.

Actual Investors
imagine ‘what if?’. 

Not ‘what is’.

Risk factors        

The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in July 2023 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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