“There are many similarities between what we have seen from the Brazilian economy between 2012-2014 and the economic signs we currently observe in Turkey. Turkey is a market that’s worth watching as it’s a substantial emerging economy in a geopolitically sensitive region, liquid and might stage a recovery near term. Turkey is an interesting option for investors as the assets are extremely cheap today and discount a lot of the depressing political situation and its economic fall-out. The currency has declined by 68% since 2008% and is trading at 20% discount to value. Turkish banks are also trading at extremely low valuation levels but they are decent businesses because they operate across the region and are typically very well run. Despite this, they trade at less than half their book value.
“We have seen enormous outflows of capital from Turkey – foreign investors have receded, yet the fundamentals in the Turkish economy are improving. President Erdogan has recently acknowledged that the weakness of the currency is untenable. The central bank has recently cut the overnight lending rates 10%, which is extremely high and substantially above inflation. Tourism has also fallen to extremely low levels historically, although it should be possible for this to start recovering slowly. The Turkish economy also benefits from lower oil prices compared to the beginning of the year, and any further fall that will be positive.
“Whilst Turkey’s situation seems quite similar it’s not an exact mirror image of Brazil. Last year we saw a huge recovery of Brazilian assets, the Real rose by 22% against the dollar, stocks rose by 69% and local bonds rose by 58% – far outperforming other emerging markets and developed markets. This is all against a backdrop where the economy has contracted by 8% over several years. Brazil had the biggest deepest recession in 85 years and was mired by corruption scandals and impeachment. The problems of corruption in Brazilian politics is still continuing with current President Michel Temer. Despite this recent turmoil, Brazil’s fundamentals remain strong.”
Markus Stadlmann, CIO Lloyds Private Bank