Erdoganomics and Turkish Equities: Finding Value in the TUR ETF Amid Volatility

The State of the Turkish Economy in 2024

GDP Growth and Economic Activity

The Turkish economy is projected to grow by 3.6% in 2024, following a growth rate of 4.5% in 2023. This growth, while modest, indicates a degree of resilience in the face of significant economic challenges. The industrial production index (IPI) showed mixed results, with a 0.4% month-on-month increase in July but a year-on-year contraction of 3.9%. This suggests a slowdown in industrial activity, particularly in the third quarter of 2024.

Inflation and Monetary Policy

Inflation remains a critical issue for Turkey, with the annual rate projected to be 51.97% in 2024, down from 64.77% in 2023. The Central Bank of the Republic of Turkey (CBRT) has maintained a high policy rate of 50% to combat inflation, reflecting the ongoing struggle to stabilize prices. Despite these efforts, inflation expectations for the end of 2024 remain high at 43.3%, indicating persistent concerns about future price levels.

Public Finances and External Debt

Turkey’s fiscal health is under strain, with a budget deficit expected to be -5.4% of GDP in 2023. The gross external debt is projected to be around $500 billion in 2024, highlighting a substantial debt burden. The current account deficit is also a concern, with a 12-month cumulative deficit of $78.6 billion as of August 2024, pointing towards a current account deficit of around $15 billion by year-end.

Employment and Poverty

The unemployment rate stands at 8.5% in 2023, with youth unemployment at 16.3%. Approximately 14.4% of the population is below the poverty line, indicating significant socio-economic challenges. The average gross salary is estimated at 35,650₺ (approximately $1,115) per month in 2024, while the average net salary is around 27,550₺ (approximately $860) per month.

Erdoganomics: Impact and Implications

Low Interest Rates and Economic Growth

Erdoganomics, with its emphasis on low interest rates, aims to stimulate economic growth by making borrowing cheaper and encouraging investment. However, this approach has led to persistent high inflation, eroding purchasing power and creating economic instability. The policy has also contributed to a significant fiscal deficit and a high level of external debt, complicating the economic landscape.

Inflation and Currency Stability

The high inflation rates have had a profound impact on the Turkish lira, leading to significant depreciation. This has increased the cost of imports, further fueling inflation and creating a vicious cycle. The CBRT’s high policy rate is a response to these challenges, but it also reflects the difficulty in achieving price stability under the current economic policies.

Fiscal Deficit and Debt Management

The fiscal deficit and high external debt are major concerns for the Turkish economy. The government’s efforts to manage these issues through fiscal discipline and structural reforms are crucial. However, the effectiveness of these measures remains to be seen, given the ongoing economic challenges and the need for significant policy changes.

Turkish Equities: Opportunities and Challenges

Market Performance and Valuation

The Turkish stock market, represented by the BIST 100, has experienced significant volatility. In August 2024, the BIST 100 index was the worst-performing stock exchange globally, with a decline of over 8%. Despite this, the market is up 19.3% over the past year, indicating potential opportunities for investors willing to navigate the volatility.

Sector Trends and Investment Potential

Certain sectors in the Turkish market show promise, particularly the Technology sector, which is trading at a high PE ratio of 35.4x with expected earnings growth of 110.4% annually. Conversely, the Utilities sector is expected to see earnings decline by 14% per year. Key gainers in recent weeks include Borusan Birlesik Boru Fabrikalari and Ziraat Gayrimenkul, while notable losers include Ray Sigorta.

TUR ETF: A Vehicle for Investment

The TUR ETF, which tracks Turkish equities, offers a way for investors to gain exposure to the Turkish market. Despite recent underperformance, with a 12.08% loss in August 2024, the ETF has gained 9.06% over the past year. The ETF’s performance reflects the broader market trends and the potential for recovery as the Turkish economy stabilizes.

Economic Recovery and Future Outlook

Signs of Recovery

There are signs of economic recovery in Turkey, driven by efforts to stabilize inflation and improve fiscal discipline. The government’s focus on enhancing production, boosting exports, and implementing structural reforms is crucial for sustainable growth. The increase in gross international reserves from $98.5 billion in May 2023 to $150.4 billion by August 2024 is a positive indicator of economic resilience.

Challenges and Risks

Despite these positive signs, significant challenges remain. High inflation, fiscal deficits, and external debt continue to pose risks to economic stability. The political context, including declining public support for President Erdogan’s ruling party, adds to the uncertainty. The outcome of the May 2024 municipal elections and potential policy changes will be critical in shaping the future economic landscape.

Investment Strategies

Investors looking to navigate the Turkish market should focus on sectors with strong growth potential, such as Technology, while being cautious of sectors facing challenges, like Utilities. The TUR ETF offers a diversified approach to investing in Turkish equities, but investors should be prepared for volatility and conduct thorough analysis before making investment decisions.

Conclusion

The Turkish economy, under the influence of Erdoganomics, faces a complex and challenging environment. High inflation, fiscal deficits, and significant external debt are major concerns. However, there are signs of resilience and potential opportunities in the Turkish equities market, particularly through the TUR ETF. Investors willing to navigate the volatility may find value in sectors with strong growth potential. The future of the Turkish economy will depend on effective policy measures, structural reforms, and the ability to stabilize inflation and fiscal health. As of September 2024, the outlook remains cautiously optimistic, with significant challenges and opportunities ahead.