What I’m Trading #1- Turkey's Tantalizing Turnaround

Turkey has long tantalized investors with its young, growing population.

Back when I covered Turkey as an emerging markets fund manager, I always came away impressed with the cosmopolitan background of the senior management of Turkish companies.

Members of the Turkish government... well.. not so much.

If you’ve read anything about Turkey in recent years…

You know that Prime Minister Erdogan’s authoritarian impulses have placed the country firmly in the Western Press’s dog house.

But here’s what’s important to realize from an investing standpoint.

Like many emerging markets, Turkey’s financial history has been a long series of boom-and-busts.

Riding a boom up is one of the most reliable ways to make money in financial markets.

(Keeping your money during the bust is a different topic!)

Recent changes in the Turkish policy landscape offer a terrific opportunity to profit from just such a boom phase.

Turkey’s State of Play

In recent years, Prime Minister Erdogan’s unorthodox economic policies have scared away foreign capital.

Elections in May changed all that.

Yes, Erdogan stayed in power. But a new economic team has promised a return to orthodoxy.

Newly appointed Finance Minister Mehmet Şimşek and Central Bank Governor Hafize Gaye Erkan (a Princeton Ph.D.) pledged to set Turkey on a "rational" path.

This was music to investors' ears.

After all, years of unorthodox policies under Erdogan triggered rampant inflation and currency collapse.

The new economic team acted quickly, delivering a massive 7.5 percentage point rate hike in July - far exceeding expectations.

The massive rate hikes telegraph a commitment to tame inflation, forecast to hit 40% this year.

Bringing inflation down from its current dizzying heights will be a prolonged battle.

But Erdogan voiced support for a "tight monetary policy" to restore price stability.

On the fiscal side, reining spending and reducing the budget deficit will be pivotal.

Enhancing productivity and boosting the private sector are also vital to put growth on a sustainable footing.

Shift in Investment Sentiment

The markets' vote of confidence in Turkey’s new policy team was loud and clear.

Six months ago, investors would not touch Turkey with a 10-foot pole.

But recent capital inflows confirm a gradual shift in sentiment among global fund managers.

The month after the May election saw $1 billion in net equity inflows.

That was the largest since November 2021 - snapping a six-month outflow streak.

The bargain-basement valuations of Turkish stocks proved too tempting to resist.

Turkey’s Borsa Istanbul 100 index may be the cheapest in the world.

It trades at just five times forward earnings.

Corporate Turkey is also tapping global capital markets after months of drought.

VakıfBank and Yapı Kredi successfully issued $1.3 billion in dollar bonds in July, attracting strong international demand.

Hot on their heels, baby goods retailer Ebebek’s $70 million IPO lured 25 foreign institutional investors.

That was more than any 2022 listing in Istanbul.

Opportunity in Turkey

The influx of foreign capital provides much-needed breathing room for Turkey's policymakers.

With inflation coming off the boil, the lira stabilizing, and risk appetite renewed, investors have a window of opportunity.

The Turkish economy has expanded 3.8% year-on-year in the second quarter. Full-year growth looks set to stay above 4%.

The green shoots are welcoming. And Turkey still faces monumental challenges.

Do I expect it to last?

Frankly, no, I don't.

Still, I know that these bouts of reform always whet investors’ appetite.

And high expectations often unleash monster stock rallies before the bubble inevitably burst.

How I’m Trading Turkey

I’m playing the Turkish market through the cell phone giant US-listed Turkcell (TKC).

My analysis of this stock goes far deeper than what I can share here.

But here’s the bottom line.

Even after its recent strong rally, TKC still has a P/E of only 5.5 and a P/S of only 1.82.

The stock is dirt cheap.

Revenues in US dollar terms should soar, the Turkish lira stabilizes, and inflation comes under control.

Assuming Turkey’s reform policy team stays in place, this stock could double over the next 12 months.

My Recommendation

Buy Turkcell (TKC) on its recent pullback. Place a wide 25% trailing stop.

For a more diversified be on Turkey, consider the iShares MSCI Turkey Investable Market Index Fund  (TUR)

Keep your bet size small. And strap yourself in for the ride. This is a very volatile stock.