Barings: A challenge to the Turkish state

On 15 July, an attempted military coup was staged in Turkey. The failed attempt precipitated a bout of volatility in the Turkish equity market and a weakening of the Turkish lira. While we are monitoring changes in the short-term political environment, our focus as long-only equity investors continues to be on identifying and investing in companies that we believe have the potential to deliver superior long-term growth.

Short-term implications

In the short term, we may see continued volatility in the Turkish market. Risk premia on Turkish assets may increase. Banks may prove more sensitive to this – as credit quality typically deteriorates in a slowing economy – while other sectors should be better shielded.

Over the medium term we believe much depends on the policy response and how this affects consumer confidence. In the days following the coup attempt, the Minister of the Economy and the Central Bank governor held a conference call, in which they confirmed that there will be no intervention on the foreign exchange side and that the monetary authorities will make liquidity available to the banking system.

Turkish officials have also stated that those implicated and detained as part of the coup attempt will face trial. Finally, officials also stated that we will not see early elections, but we continue to monitor the situation.

Strategy & outlook

The short-term situation in Turkey may remain politically charged, but we do not believe the opportunity set in the Turkish equity market has fundamentally changed.

We continue to see opportunities for quality growth companies that we believe offer compelling long-term growth stories.

Tupras, the country’s leading refiner of petroleum, is a prime example. The attractively valued company has an excellent franchise, a credible management team and strong financial metrics. With a capital expenditure programme recently completed, the company should realise production efficiencies with a reduced environmental impact in the near term. Management have nimbly navigated oil price volatility in recent years to deliver strong earnings growth.

We would also highlight our holding in Ford Otosan, the automotive manufacturer. The company, a leading franchise within the Turkish market, benefits from a competent management team focused on efficiency as well as a healthy corporate balance sheet. We expect strong demand from its newest fleet launch, particularly in export markets, to underpin strong earnings growth.

Looking beyond the short-term volatility, we see many reasons for investors in Turkish companies to remain positive. We expect the investment case for the companies that we hold to remain intact and believe a focus on building portfolios of quality growth companies will lead to superior risk-adjusted returns over the longer term.

Ghadir Abu Leil Cooper, head of EMEA and Frontiers Equities at Baring Asset Management

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