Photo by Anna on Unsplash

Published May 7, 2021

Perhaps it is the world we live in, but the economic events in Turkey over the past couple of years would usually make bigger headlines. Although the world is more occupied with start-ups, memes, and crypto, a storm and opportunity in Turkish stocks are brewing.

Over the last 24 months, the country’s currency, the Lira, has lost nearly half its value. The stock market has lost about a quarter of its value in USD terms, and inflation is currently near 20%.  Yet, the biggest headlines regarding Turkey are bitcoin exchange frauds.

Working off my prior discussions of market cycles here and here, I want to explore the current situation in Turkey and put it into a cycle perspective. From there, I’ll discuss what makes sense to focus on in Turkish equities and bonds and delve a bit deeper into my screening selection process. The Castaway Capitalist has a lean crew and, like everyone else, needs to prioritize not only current investments but also seeking new ones.

The Background on Turkey for Investors

As of 2019, Turkey had a population of 83 million and a GDP of approximately US$750 billion, according to the World Bank. I will simplify a lot here at the risk of stepping on toes and skipping things. Apologies in advance, but it’s the nature of a blog.

Turkey straddles Europe and Asia and is a force in either location. Its population would make it one of the largest countries in Europe. Within Asia Minor and the Middle East, it is one of the three most populous countries, alongside Egypt and Iran. Unlike those two powers, however, Turkey’s natural resources are few and certainly less developed.  


Politically, Turkey is highly complex on many layers. Nationally and from the outside, it appears that Turkey is an authoritarian, increasingly Islamic country. I think part of this has to do with the lens that Western media uses when it talks about the current president of Turkey, Recep Tayyip Erdoğan. At best, I think this view is exaggerated and oversimplified. Founded as a republic in 1923, Turkey is more secular at a societal level and an amazing cultural melting pot.

Internationally, Turkey is a member of NATO and engrossed in a highly complicated relationship with Europe. Turkish ascendency into the EU has been a discussion for decades, and Turkey has served as a retention point for would-be refugees/migrants to the EU. The more nationalist and assertive attitude of Erdoğan has made these matters all the more complex. This is before we even talk about Cyprus, which I referenced in my last post.

If we look to Asia, the picture is equally complicated. With the withdrawal of the US from the region, Turkey has attempted to fill part of the void. It has been a sponsor of Sunni groups in the Syrian civil war and intervened in Syria to halt the progress of Kurdish groups, which they consider terrorists. It also has internal issues with its own Kurdish populations. Yet, at the same time, Turkey is one of the largest investors in Kurdish-controlled northern Iraq.  It is an interested party in Libya as well.

While its interests in the Syrian civil war appear at odds with Russia’s, it has stoked controversy within NATO by buying Russian defense systems. It houses US military bases, but the US has accused its banks of aiding Iran to evade US sanctions. It is now also in talks to sell military drones to Ukraine, which is also a sore point for Russia. Historically, Russia and Turkey have been enemies, but Russia is a major supplier of energy.  

As if you needed more, it has a troubled relationship (at best) with its neighbor to the east, Armenia. Recently, Turkey supported its ally, Azerbaijan, in its brief war last year with Armenia over disputed territory.  

Despite all of this, it is still a popular tourist destination on its Mediterranean coast for those seeking sun and fun on a budget.  It’s complicated.

Economy and Markets

Turkey is a middle-income country. Traditionally, it has not had many natural resources other than geography. Modern Turkey, particularly as it relates to the stock market, is a large intermediate goods producer. While it relies on a balance of engineering and technical know-how, its fit in the global economy is traditionally an assembler of durable goods. It has certain niche crops in agriculture, like hazelnuts, and sectors like tourism, both coastal and Istanbul, but manufacturing is the large-scale component.  

Another critical consideration for Turkey is the currency. Like nearly all Mediterranean countries, Turkey has had chronic issues managing interest rates, foreign debt, and currency. It has had a secularly weak currency, high interest rates, and high inflation. The reasons are beyond this blog, but it will likely continue to be the trend. As evidence, in 2005, the country removed 6 zeros from the currency to bring in the current currency, the New Turkish Lira.  

A key consequence of this instability is dollarization within the Turkish financial system. Looking at the banking sector aggregates published weekly by the Turkish Central Bank, Turkish savers don’t trust the local currency and save as much as they can in USD and EUR. Companies in Turkey, especially exporters, prefer to borrow in USD and EUR because interest rates are lower.  

Therefore, FX-denominated assets make up a material portion of the system’s assets and just about half of the system deposits. This can create a lot of instability, even if well managed.

Many Turkish companies have gotten into trouble over the past years after borrowing in EUR and USD to save on interest after GFC. Large companies, including Turk Telecom and several construction companies, have had to restructure. You can read more about the overall climate here.  

To wrap up, Turkey is also a classic twin deficit country, having run substantial fiscal and current account deficits, as shown in the charts below:

10 year chart of Turkey budget deficit and current account as a percentage of GDP

This, combined with dollarization, makes Turkey particularly vulnerable to FX moves and external shocks.

It is essential to point out that, at this point, this is not a government debt problem. Turkish government debt and, more specifically, FX-denominated debt is relatively small. Government debt currently stands at ~40% of GDP, and foreign debt only makes up 40% of government debt

Where is Turkey in the Cycle?

Honestly, it is a bit difficult to tell. The response to the COVID pandemic globally has muddied the waters, but let’s take a look at a few items discussed in prior posts, namely:

  • FX Reserves
  • PMIs
  • Credit and Money Supply
  • Yield Curve
  • Turkey in Global Context
  • Recent Performance of the Lira and Turkish Stocks

In general, I find that Turkey is probably somewhere between the peak and the trough of this latest cycle.

FX Reserves

The trend in foreign exchange reserves for a country is an important indicator for an emerging economy. As reserves grow, so does the economy and the stock market. The currency usually appreciates vs. the USD, too.  

In Turkey’s case, if we look at the chart below, we can see that Turkey’s foreign reserves peaked in 2009 and have been in decline since. What is more important to note, however, is forward and swap position building starting in 2019. The position has become so large that Turkey is short more currency in the derivatives market than cash and securities on hand.  

5 year graph of Turkey Gross FX Reserves, ST Debt Service, Derivatives Position and net position in USD billions
Source: CBRT

Although the above improves when to roughly flat on a net basis when we add the central bank’s gold holdings, this is a precarious position.  This position is a likely indicator of more pain to come on the FX rate.


I look at the joint survey between the Instanbul Chamber of Industry and Markit IHS, which covers the manufacturing side of the Turkish economy.

Since peaking at nearly 60 last year after the worst of the pandemic, the index has drifted closer to the neutral 50 levels. The latest survey mentions increases in new orders, output, and employment yet states that supply-side constraints (which positively impact the score) remain elevated. 

All in all, not particularly conclusive.

Credit and Money Supply 

Looking at private sector credit, it had a massive run-up through 2020 but has tapered off since October of last year. 

M2 in Turkey shows a similar, perhaps more, subdued representation of the same elements.  We have a pause at the moment but no indication of duration.  

Both points, however, do indicate a slow down in activity with no confirmation of it being over.  The last time we saw such a prolonged flattening was during the end of 2018, when global financial conditions were much tighter than they are today.

5- year chart of credit and M2 growth in Turkey

Yield Curve

The yield curve is also a forecaster of liquidity in the system, and Turkey has been the only major country in the world to go significantly inverted in the last six months.

Below is a chart of yields from World Government Bonds.

Turkey TRL government bond yield curve now, 1-month ago and 6-monts ago.

The curve went from steep to inverted in about nine months. It is now only slightly inverted from the middle to the end of the curve. 

Usually, when a curve goes from inverted to normal—“bull steepening” in bond-lingo—it bodes poorly for the overall economy and indicates a recession. Short-term interest rates usually only fall when times are bad. Note: Check these prices yourself as TRY bonds are not the most liquid things.  

This data point should make us a bit cautious.

Turkey in a Global Context

It is difficult for an economy like Turkey to do well when the rest of the world is in the doldrums. The opposite is not necessarily true since countries can struggle while the rest of the world hums along.  

As I mentioned in my recent newsletter, I think a few confluences could lead to headwinds in the global economy starting in the second half of this year. YoY comparables will have normalized. The stimulus will have happened, though unlikely to reach the aspirational levels discussed today. Either the economy will remain on lockdown, depressing activity, or the economy will open, removing the supply constraints that have driven inflation. None of these items are particularly positive over a long time.

As such, and given the stigma investing in Turkey currently has, it is unlikely to be an investment destination over the next six months. There is too much perceived uncertainty.  

Recent Performance of the Lira and Turkish Stocks

Reviewing a few of the market indicators, we can glance at the charts of the USDTRY and the Istanbul 100 index to get a high-level view.  

Looking at the Istanbul 100, the chart was rounding out before the March announcement of the new CB head that sent the market plunging. Turkish stocks appear to be consolidating now, but my guess is that it trends lower.  


This also coincided with a rise in the USDTRY, which remains elevated but not yet at all-time highs.


In both cases, however, I do not believe the pain is over, though perhaps limited.

For currency, the next logical level is the 8.50 seen during peak COVID. For the stock market, the stock market index has some strong support around the 1,200 level first, or about 15% lower in TRY terms.  

Neither of these charts signals that we need to buy Turkish stocks right now or miss out. Instead, I think we have time to do the work on the opportunity set.

My Best Guess on Where We are in the Cycle

My hunch is that we are on the eve of a more prolonged recession in Turkey. Indicators are generally fading, and the yield curve has inverted and is now normalizing. It could just be an intermediate pause, but the magnitude of some of the moves, particularly in FX and the yield curve, suggest otherwise.  

What this means is that we can look at government bonds and Turkish stocks in certain sectors. From my prior article, sectors that come to mind are exports or stocks listed in Turkey but operating outside of Turkey in stronger markets. If no names come up there, we can begin to work on companies that generally do well into the trough, like telecoms, utilities, and defensive sectors.   

Screening for Turkish Stocks and Where I am Focusing Now

Some investors take a highly quantitative approach to screening. I am not one of them and instead opt for a slightly more labor-intensive approach.


In emerging markets, mainly when you get into smaller cap stocks, the devil can be in the details. Unless you go through the company website and cursory financials, you won’t feel for a business and its capabilities. There could be dormant assets or investments that have not yet generated returns. Accounting systems are not always standardized. It can be difficult.  

I’ll go through this in more detail in a moment, but let’s first address the elephant in the room… 

Why Not Buy the TUR ETF?

This is certainly an option, and if you’re willing to be patient over a few years, I think you can make good money. It’s a diversified basket of companies and is focused mainly on traditional businesses emphasizing traditional cyclical stocks. Because the worst may not be over, patience and looking at the technicals would be key.

I think I can do a bit better by avoiding financial stocks and all but the most specialized of cyclical stocks for the time being. With TUR, as shows, you are buying big weights in financials, steel companies, food retailers and manufacturers, durable consumer producers, and auto companies.  

Considering where I think we are in the cycle, it’s a risky move to go after intermediate producers. Currently, their margins are squeezed due to higher input prices, and they may have a demand issue in the second half of the year when the reopening trade wears off.

As I mentioned earlier in March and April on Twitter, I tried trading the TUR for a bounce after the central bank governor was removed, but it has been tightly range-bound since.


So What Have I Done?

I’ve been running stock screens on Turkey on the Trading View website with my current low-cost set-up. This is an art, not a science. The process is as follows:

  1. Run basic screen on for the following:
    1. P/E < 10x
    2. Market Cap > TRY100 million
    3. No financials
    4. P/FCF<15x
  2. I then go through each company to find out what they do and eliminate names based on the following:
    1. Sectors that do not match where I want to be in the cycle, like materials, financials, and other traditionally cyclical sectors
    2. Non-existent or non-English disclosures
    3. Consider names that might be in the wrong sector but a unique situation that warrants more work
  3. If I have less than five names from this process, I will rerun the screen but drop the P/FCF<15x condition and repeat step 2 for this new screen
  4.  With the list of names (hopefully ten or less), I will prioritize analysis based on:
    1. Anything Event-Driven
    2. Valuation
    3. Technicals
    4. Positive externalities (sector or country knowledge, etc.)

Perhaps the above is too simple, but it’s worked for me in the past.

I’ll point out that with a bit of experience analyzing bonds for Turkish companies, some names may sit off these screens that I know I want to examine. I have no formula because it comes from previously knowing a company that might be an opportunity.

But before we move ahead…

A Note on Turkish Government Bonds

If my rough assessment of where we are in the cycle is correct, Turkish government bonds should make a reasonable investment over the next 12-18 months. I have been trying to buy some shorter-duration bonds, but as a gringo without a local account at this point, it has proved difficult.  

It is not a liquid market, and I have wanted to test things first. Bonds currently offer a low teens return out a year, and mid to high teens beyond two years. Unless the country is truly spiraling out of control, a smaller bond position should offer some good risk-reward even if the currency depreciates; it’s difficult to lose a lot of money with that level of yields. The currency could move another 50% against the USD over the next couple of years, and you would still break even.

The significant risk would be capital controls, but I think that would apply more to Turkish nationals than foreign capital as things currently stand. Foreign capital simply does not make up enough of the current investments in Turkey to warrant the effort, but I could be wrong. According to the government debt management office, non-residents held less than 4% of Turkish government debt at the end of March 2021.

What Have I Come Up with on the Equity Side?

You will have to wait until I get the work done in the coming weeks to give the exact names, but my filtering came up with five Turkish stocks; three traditional holding companies, one telecom, and one industrial.

All but the telecom have major exports, and only one comes with a P/E over 10x.  

I hope to share a couple of the higher priority names soon.

The Castaway Capitalist

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