Turkey ‘overconfident’, says ING

Structural weaknesses in the economy continue to hold back Turkey’s equity performance, says Maarten-Jan Bakkum, senior strategist Emerging Markets at ING Investment Management.

Turkey is seen to have an excellent position among emerging market economies, Bakkum said.

A young and increasingly educated workforce, diverse economy, good location between Europe, Russia and the Middle East, and expectations it can maintain a growth rate of 5% over the next two decades.

“Even so, the Turkish equity market has been rather weak recently,” Bakkum said.

“And even over the long term the Turkish market’s relative performance against the emerging market index has not been convincing. Whereas, for instance, the Indian and Brazilian markets have clearly outperformed the index over the past 15 and 10 years respectively, the Turkish market has posted rather modest returns: in fact, since 1997 investors in Turkey have not earned more than the emerging market average.”

The explanation for the lagging performance is in the country’s approach to running its economy, Bakkum suggested.

“Every time the Turkish economy gathers momentum, the current account deficit or the inflation figure immediately shoots up. True to form, during the present economic boom the current account deficit has soared, to more than 8% of GDP. And inflation, which is still surprisingly low, will probably rise over the coming months.”

Politics is looming large because the country is going to the polls in June. The governing AK Party wants to run on its economic record, which ignores the need for changes to fiscal and monetary policies to stop the economy overheating.

“The strong economy seems to be a guarantee for electoral success. But this ignores the huge risks of another economic crisis. Because how will Turkey finance its deficits if the oil price remains high and investors’ confidence in Turkish economic policy continues to wane?”

Bakkum expects the boom-bust cycle of past years to repeat itself going forward, thus limiting the success of the Turkish equity market.

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