The stock market turco has experienced strong growth this year: the index MSCI Turkey it is up 62% in dollars since the beginning of the year (as of 11.21.2022).
This is an extraordinary performance when compared with the indices MSCI World e MSCI Emerging Marketdown respectively by -17% he was born in -22%. Even more extraordinary considering that the Turkish lira has depreciated by -29% against the dollar in this period.
They write in a comment Mohsin MemonEmerging Markets Fund Manager, e Andrew RymerCFA, Strategic Research Unit, Schroders.
Why has the market performed so well this year?
According to Memon and Rymer, the main driver of market performance this year has been high domestic inflation. With interest rates so negative and government yields unattractive, local investors were forced into the market to try and protect their savings from rampant inflation.
“Although the market performance in local lira terms did not surprise us, we would have expected a much weaker performance in dollar terms. Given the negative real yield, lack of central bank reserves and high current account deficit, we expect, the analysts continue, that the lira is increasingly under pressure. Historically, most lira market gains have been offset by currency depreciation.
If the aggregate valuations of the MSCI Turkey Index were attractive a year ago, they are no longer attractive in the context of emerging markets. Return on Equity (ROE) increased significantly, distorted by high inflation. As a result, foreign investors have become increasingly concerned about the long-term ramifications of the domestic policy mix and the uncertainty it has created.
Long-term prospects in Turkey according to Schroders:
Again according to Memon and Rymer’s analysis, invest in Turkey has several long-term attractions for foreign investors. The demographics are favourable, with a relatively young and growing population of 85 million peoplein support of internal growth prospects.
Exports have become increasingly important and Turkey is well positioned to seize export opportunities in the growing markets of the Middle East. In fact, we find many well-managed companies in Turkey.
However, the macroeconomic outlook is increasingly vulnerable, with downside risks to earnings, and we could see further currency weakness. In the absence of major policy changes, these problems are bound to grow.
“For this, for a long time we maintain a neutral view on Turkey. The market has delivered strong gains in US dollar terms this year and has outperformed emerging markets.” Reads the note from Memon and Rymer.
“As we explained, analysts continue, this result was driven by non-fundamental factors and macroeconomic policy remains weak. With parliamentary and presidential elections scheduled for next year, political uncertainty is set to increase, exacerbating macroeconomic fragilities. Against this backdrop, the market trajectory looks unsustainable and our outlook has turned decidedly negative.”