Turkish stocks are cheap – but for a good reason
Turkish stocks are undoubtedly cheap, and very brave bargain-hunters may spy opportunity, but this market is cheap for a very good reason.
"I am fully prepared to swiftly destroy Turkey's economy," vowed US president Donald Trump last week. Angered by Turkey's attack on the West's Kurdish allies in Syria, Trump sent a letter to Turkish president Recep Tayyip Erdogan urging him not to "be a tough guy". The Turkish strongman responded that he had thrown Trump's missive "in the bin".
For all the absurdly theatrical posturing, the reality is that the White House has taken only "milquetoast" measures to punish Ankara, note Keith Johnson and Elias Groll in Foreign Policy. Sanctions against three Turkish officials and the country's steel industry were little more than a slap on the wrist. Yet with the country's lira currency already "getting thumped", it is clear that America could inflict "plenty of economic pain on Turkey" if it wants to.
Repeating past mistakes
Erdogan talks of 5% growth next year, says Laura Pitel for the Financial Times, but the economy will barely grow at all in 2019. The president's plan is to stoke animal spirits "the way he knows best": he fired the central bank governor this summer and the new appointee has "slashed 7.5 percentage points" from interest rates over the past two months. More loose money will only lay the foundations for another crisis.
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"Turkey's economy is tanking," writes Craig Mellow for Barron's. More easy money will not help the extremely fragile and heavily indebted banking system. The government's budget deficit could be as high as 8% when you factor in loans guaranteed by state banks, says Cem Karacadag of Barings. Erdogan's apparent willingness to run the "gauntlet of Western disapproval" is another bad omen. Russia tried a similar approach after it invaded Ukraine in 2014: international investors packed their bags and the Russian economy has struggled ever since.
Very brave bargain-hunters may spy opportunity. On a cyclically-adjusted price/earnings ratio of 8.3, Turkey's stocks are undoubtedly cheap. Yet with politicians poised to repeat the mistakes that caused last year's financial crisis and US policymakers debating whether to ramp up sanctions, this market is cheap for a very good reason.
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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
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