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Turkey economic growth forecast and concerns

June 2018

Trip notes: Postcard from Turkey

Our investment team visits Turkey to assess our portfolio positioning given the strong growth outlook but considerable risks.

This past month we spent a week in Istanbul, meeting with company management, political figures and policy experts. Turkey remains a market full of contradictions for us as strong economic growth and a vast investment landscape is tempered by a myriad of risks.

Turkey’s GDP growth in 2017 was c.7%, a figure way ahead of expectations from the start of the year. Growth was largely stimulated by fiscal spending programmes and a strong post-coup rebound in 2016. In the absence of any external shock (which might be a big ask given the tightness in oil markets and the high risk situation in Syria), the high-growth policy of fiscal expansion and unorthodox monetary policy looks set to continue.

Whilst the magnitude of growth is likely to be strong, the macro picture looks fragile and volatile.

Whilst the magnitude of growth is likely to be strong, the macro picture looks fragile and volatile, and lira risks remain. In our view, the lira looks very sensitive to external shocks and we saw a bout of weakness in early April as Syrian tensions had ratcheted upwards.  Most indicators point to the continuation of a weakening lira – oil prices, Fed tightening, Syria and government purges.

The question that follows is how to position ourselves in this market? Our stock picks aim to steer clear of corporates that fund lira denominated businesses through FX denominated debt. Given such a strong demographic backdrop and the potential for fiscal stimulus, there are undoubtedly good growth stories and good investment opportunities. However, funding local revenue with hard currency debt is a net negative in this environment and a massive hurdle to overcome. As such, our portfolio convictions lie mainly with select quality consumer names and banks. Our positions aim to provide exposure to the favourable demographics and strong economic growth whilst providing some respite from the risks inherent to the Turkish market.