Buy Disaster
Investing in Turkey
A trip to Istanbul in 2006
I last visited Turkey in the summer of 2006. I was fascinated by the rich history, culture and the people. The best part was sitting by the Bosphorus sea and enjoying Apple Tea.
I find it remarkable that Turkey (Istanbul the capital) exists both in Europe and Asia. I spent most of my time on the European side of Istanbul. However, a 25 min ferry ride would take me into Asian territory. To my surprise, the Asian side of Istanbul was very different culturally to the European side. I would recommend Turkey (especially Istanbul) as a great holiday destination, once the global pandemic recedes.
This is not a holiday newsletter
The point of this post is not to recommend holiday destinations, but to talk about a potential investment opportunity.
The kind of investment where you see a pile of cash sitting on the floor, and all you have to do is go pick it up. This is slightly over exaggerated, but I think the upside potential for Turkish shares is compelling at this point.
Bank Run
There is a lot of negative news on Turkey right now. The main one is the big depreciation in the value of the Turkish Lira. High external debts and shrinking foreign reserves are to blame. The depreciation has been ongoing for a few years but has recently started to accelerate. This depreciation is causing inflation and a lot of panic. The Turkish people are queuing up at banks, taking cash out and exchanging it for gold, dollars and other stable assets. On top of all this, the country (like most other countries) is also having to deal with the disruption caused by the pandemic.
There is a lot of hope
Amidst all the bad news and uncertainty in Turkey, it is important to be aware of some positives. These could act as long term catalysts to propelling Turkish stocks.
Benefit from low energy/oil prices (Turkey is a major importer)
Benefit from global low interest rates (debt refinancing)
Strategically positioned as the link between Europe and Asia
Attractive tourist destination
Young, dynamic and diverse pool of labor. 13 Million People between ages of 15-24, making it the youngest country in Europe!
Labor is cheap
Competitive advantage in manufacturing (Textiles). Ideal place to produce PPE.
Likely to benefit from post Covid-19 global supply chain rebalancing measures. Many companies will choose to manufacture in Turkey https://www.ft.com/content/24db45c0-9393-11ea-899a-f62a20d54625
Supply chain resilience amidst Covid-19 pandemic https://www.ft.com/content/24db45c0-9393-11ea-899a-f62a20d54625
Heavy devaluation in the Lira makes Turkey an even cheaper hub for manufacturing
Turkey could benefit from strengthening ties with China. Chinese investment into Turkey is increasing especially in infrastructure https://thediplomat.com/2020/07/china-to-the-rescue-in-turkey/
Entrepreneurship is rampant in the country
Hosts a prominent tech start-up economy https://www.ft.com/content/53c81984-f975-11e9-a354-36acbbb0d9b6
If this bulleted list does not make you feel even slightly optimistic, then I’m not sure what will. There is an old saying, “Fortune follows the optimists, not the pessimists”. So, perhaps it is time to be optimistic then ?It is scary to see bank runs and rampant inflation in Turkey, and the easy option would be to wait for the situation to settle. Unfortunately, if it were that simple, then investing would be easy and we could watch Netflix all day long. By the time the situation settles, asset prices may readjust significantly upwards. This is why they say “Buy panic, sell hysteria”.
The Opportunity
One must have faith that Turkey will eventually get through this economic crises and that the currency will eventually stabilise. In the process, asset values have fallen and continue to fall, but we are probably closer to the point of maximum pessimism. One thing for sure, there are bargains in the Turkish stock market relative to the rest of the world. Since March 2020, global stock markets of major economies have rallied relentlessly, all apart from Turkey. See the table below. It represents a table of stock market relative strength over the past Quarter. I took this chart from @gtlackey recent twitter post.
There are many ways to exploit the opportunities in Turkey. One of the easiest ways for international investors is to look into the major Turkish ETF by IShares MSCI (TUR). Currently trading at $21, not far from all-time lows of $17.6 in Mar 2020. Alternatively, you could further my own research by finding individual companies. I am personally bullish on the tech start-up economy in Turkey. If you know of any strong tech companies in Turkey that are listed on the Turkish Stock Exchange, please kindly direct message me.
Risks and Warnings:
As with any investment, there are risks involved. The views presented in this post are my own and I might be wrong. Please undertake your own due diligence in regards to investing in any stocks and proceed with extreme caution.