Turkish Delights

6 mins. to read
Turkish Delights

When you take off on Turkish Airlines (Türk Hava Yollari (IST:TUYAO)) a chap dressed as a pastry chef, all in whites and hat, proffers you a tray of fresh Turkish delight. Even in Economy. Turkish Airlines has been voted Airline of the Year for the last five years: not just because of its unrivalled route network, with its hub in Istanbul, but also because it tries harder than other airlines.

If you are flying from London to Kathmandu or from Moscow to Rabat or from Rome to Almaty, the chances are that the best option will be on Turkish Airlines via Istanbul. Plus you get nice service at competitive prices.

A lot of people take the opportunity to break their journey in Istanbul for a few days. It is probably one of the most extraordinary cities in the world, spanning two continents, two great religions and two thousand years.

This visit, I don’t have too much time for history, unfortunately; though you cannot escape culture here. I am holed up in a high-rise hotel in the financial district. From my windows on the 28th floor I can see across the Bosphorus to Asia to the east. (I wish I could tell you that I can see minarets glinting in the sunshine, but the entire metropolis – which is even vaster than London – is covered in a layer of diesel-flavoured smog. It’s worse than Delhi.) This tower is surrounded by a forest of other towers, many still under construction, some with busy helipads, which proclaim the names of all the world’s great finance houses. You kind of get the idea this is an important regional financial centre.

Turkey’s economy is set to overtake Italy’s in the next five years and possibly Canada’s in the next ten, which will no doubt entail some re-arrangement of chairs at those G-8 summits. But then growth forecasts are just extrapolations – which are usually wrong. My point is that Turkey is often denied the prominence that it deserves.

As an undergraduate in economics I was taught the hierarchy of economic status: developed countries, developing countries and the Third World (a term based on the pre-revolutionary French social model of the three “estates”). What I see now are three new “estates”: the Indebted World (Europe, USA and Japan), the Cash Generating World (net exporters without gargantuan welfare states – China and India, pre-eminently); and then, sadly, the Un-investible World.

Turkey stands amongst the cash-generators. It is the 18th largest economy in the world and a major exporter with a population of 77 million people. Growth has slowed from 8.8% per annum in 2011 to just 2.9% last year – but that is still way ahead of its European neighbours.

Most of us view Turkey as a pleasant holiday destination: we don’t think of Turkey as an economic powerhouse. But this is changing. We are starting to notice Made in Turkey labels on consumer, clothing and food products that we buy. And we are hearing more about Turkey’s pivotal regional role.

I agree there are causes for concern in the political arena and grave downside risks on the geopolitical front. (Let’s not mention Syria and the refugee crisis for now, important as they are: I’d like to analyse these in detail in the May edition of the MI magazine.)

But just recall that back in the 1980s and ‘90s Turkey was an economic basket case. Chronic inflation over many years and a persistently negative balance of payments resulted in periodic currency crises. The Turkish Lira was regularly devalued. Things came to a head with the Turkish banking crisis of November 2000. US$6.4 billion of net foreign exchange flowed out of the country in two weeks. Overnight interbank rates soared to 1,700%[i].

The situation was stabilised by a US$10 billion package provided by the IMF – but with strict conditions attached. The Turkish government was obliged to embark on a widespread privatisation programme. And, as usual, Dr IMF prescribed a programme of structural reforms designed to promote fiscal discipline, transparency of public accounts, agricultural reform, pension reforms, taxation and tax collection.

After considerable pain, the medicine began to work. Turkey’s return to growth coincided with the coming to power of the redoubtable Mr Erdogan in 2003. Mr Erdogan, for all his many faults, has steered a broadly pro-business course. He has presided over more than a decade of economic growth. Unemployment is much better than in the bad old days, but has flat-lined at 9-10% over the last five years. Public finances have greatly improved, although the fiscal deficit is likely to deteriorate this year[ii]. Construction has boomed.

Turkey shrugged off the Credit Crunch of 2008, with 9.2% growth in 2010 and 8.8% in 2011. In 2012 Fitch upgraded Turkey’s credit rating to investment grade (to BBB- from BB+) and Moody’s followed suit with a ratings upgrade in May 2013 (to the lowest investment grade Baa3) citing the robust good health of Turkey’s public finances. In November 2015 S&P held Turkey’s rating at BB+. The direction of travel is clear.

Turkish exports have been rising, not least because Turkey has turned East and South. Whereas about a half of all Turkish exports used to go to the EU, now it is only one third. (Another reason why I think Turkey is not really serious about joining the EU – which I shall unpack elsewhere.)

Turkey, with a rich agriculture and plentiful water, is a major supplier of foodstuffs across the Levant and Central Asia. It is a major manufacturer of consumer electronics, appliances, clothing and textiles. And it has a large and growing automotive industry, being the seventh largest producer of cars and commercial vehicles in Europe (behind the UK but ahead of Italy).

Turkey is the fourth largest shipbuilder in the world and has a burgeoning defence industry. It is the 10th largest mineral producer in the world with extensive natural gas reserves in the Black Sea and some oil too.

The Turkish Lira has held up relatively well since its revaluation in 2005 when Turkish authorities knocked six zeros off the old Lira to create the New Lira. This has depreciated somewhat against the Euro, the Dollar and Sterling since then. So it’s not exactly a Deutsche Mark in a fez – but a far cry from the old days when the currency plummeted from one year to the next. Currently a Euro is worth about TL3.2.

The Istanbul stock exchange is characterised by a relatively small number of liquid stocks, most of which are banks and industrials, the latter being largely conglomerates (out of favour in Anglo-Saxon stock markets, I know, but still mainstream down here). If you wanted to get exposure to Turkish equities you could go for a fund that tracks the Turkish market as a whole. One such is the HSBC MSCI Turkey UCITS ETF (LON:HTRY), which is incorporated in Ireland and managed out of London by HSBC Global Asset Management. (It is UCITS IV compliant.) The fund aims to track the MSCI Turkey Index by passively holding 25 of its largest stocks in proportion to their weightings in the Index. While its base currency is the US Dollar, there is a Sterling share class available.

The fund’s top six holdings currently are: Türkiye Garanti Bankasi, Akbank TAS, Bim Birlesik Magazalar, Turkcell, Türkiye Petrol Rafinerileri and KOC Holdings. The top ten holdings account for about 68% of the modest £7 million or so under management. In terms of its sectoral allocation, it is 45.5% financials, 14.16% consumer staples, 13.7% industrials and 8.5% telecoms.

You might be inclined towards this fund if you believe that the Turkish market has been oversold since its peak back in May 2013. The fund is down by 6.15% over one year but up a chunky 23.5% over three months. Turkish equities sail in choppy waters. Do not forget that there is still exchange risk in investing in Turkey, though much less than in the bad old days. And I would not wish to ignore the political risks – of which more later.


[i] See: The Turkish Liquidity Crisis of 2000: What Went Wrong? By C Emre Alper, Department of Economics, Bogazici University.

[ii] See: http://www.focus-economics.com/countries/turkey

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