Turkish stock market hits 2008 lows: bargain or trap?

Turkish stock market hits 2008 lows and some already see a bargain

The Turkish lira has depreciated by 13% and the country's stock market is trading at levels last seen during the global financial crisis. For an investor who entered nine months ago, the result is an average return of 37.30% in euros, currency effects already factored in. Three specific names: Soda Sanayi, up 36.65%; Ege Endustri, up 54.54%; Borusan Mannesmann, up 20.73%. The S&P 500, over the same period, just 3.66% in dollars. Depending on who you ask, the play has paid off handsomely.

The underlying argument is straight out of the textbook: a fast-growing country, with a customs union with the EU, a current account deficit of 4-5% of GDP, public debt of 28% and reserves of 140 billion. A coup attempt in 2016 broke confidence and triggered a capital flight that accelerated in 2018. The result is a market where, according to this analysis, every company has fallen without distinguishing good ones from bad ones. A P/E of 5 or 6 for companies that were earning between 15% and 20% in 2017.

The currency effect on profits

The central thesis is that a weak lira benefits exporters. A company that sells in dollars and produces in liras sees its real costs fall while its revenues hold steady. The example being used: a company with 100 million dollars in sales invoiced 360 million liras in 2017 and would bill 470 million for the same turnover. Profit in liras through the roof. Real wages fall, expenses get cheaper and margins widen.

Not everyone buys the story. The strongest objection is that the equation has two sides: if the company imports raw materials, energy or capital goods, costs double and the 100 million in profit can shrink to zero. Or turn into losses, if there is leverage. Foreign-currency debt also weighs: it becomes more expensive to repay with a devalued currency.

The Mexican precedent and the falling knife

The parallel being drawn is with the 1994 tequila crisis: public spending surging before an election, a blow-up shortly after, and an external sector that saved the day with exports growing 30% a year while the rest of the economy collapsed. The difference pointed out is the exchange rate: Mexico had a fixed regime, while the lira is flexible and has long been pricing in the adjustment.

Scepticism has its own school. The Turkish stock market is sensitive to global downturns, and if developed markets crash, emerging markets amplify the move. The classic advice —never catch a falling knife— clashes head-on with value investing. And some remind us that the Tokyo stock market still has not recovered its 1990 peak.

What to buy within Turkey

Selection matters. The focus is on companies that invoice in euros or dollars: Ford Otosan, which manufactures vehicles for Europe, or TAV Havalimanlari, an airport operator in Turkey, the Middle East and Central Asia. On the other side, a telecom focused on the domestic market would suffer from the collapse in consumption. The construction company Enka Insaat comes up as another candidate to analyse.

Politics adds noise. Erdogan wants low rates, which in theory depreciates the currency but accelerates growth. The economy minister is his brother-in-law. And the spectre of capital controls hovers overhead — in Greece, they sent the stock market into freefall.

With the lira at historic lows against the dollar and the euro, the question is not whether Turkey is cheap, but how much of that cheapness is a discount and how much is a warning. For now, the market answers every morning.