This article is part of Morningstar's "Perspectives" series, which is a series of articles written by third-party contributors. Here, HSBC Global Asset Management outlines the current economic and market conditions in Turkey.
The Turkish equity market has been one of the world’s best performing equity markets with a year-to-date return of more than 30% in dollar terms. Although there may be a short-term correction as the global stock market rally pauses for breath, optimism remains in the medium to long term as the country continues to emerge as a regional economic power.
Ercan Güner, manager of the US$172 million HSBC GIF Turkey Equity fund, managed from Istanbul, said the Turkish economy remained resilient to the global economic downturns witnessed in recent years, benefiting from low levels of public and household debt, favourable demographics and a solid and profitable banking industry.
A decade long disciplined budget policy reduced the debt to GDP ratio sharply. Following a slight increase in 2009, it came down to 42% in 2010 and this is expected to continue to fall in coming years. It is now one of the lowest in Europe. The low level of household debt at only 18% of GDP and an embryonic mortgage market will provide fuel for future growth potential of the Turkish economy. Furthermore, Turkey’s 72 million population is growing by 1.3% per annum. The average age is 28. Only 15% of the population is expected to be over 60 in 2025.
After posting strong GDP growth rates of 9% in 2010 and 8.5% in 2011, Turkey’s growth rate is expected to moderate to 3.6% in 2012, according to the latest survey of consensus expectations released by Central Bank of Turkey (CBT). This would represent a soft landing rather than a return to the “boom and bust” periods that the Turkish economy typically experienced in the 1990s.
Additionally, the country remains somewhat insulated from the economic crisis in Europe. Although Europe is a major export destination, Turkey managed to increase its export performance by gaining market share across EU markets where demand for cheaper quality products has increased. Another important factor behind the strong export performance was Turkey’s increasing penetration to MENA countries on the back of strengthening political and economic ties with the region. Being highly dependent upon imports of energy and raw materials, the Turkish economy has also benefited from easing oil and commodity prices.
These combined factors have helped to reduce the sizable current account deficit, which reached 10% of GDP in 2011, whilst inflation has dropped to 9.1% from double digits in 2011 and is expected to decline further to 6.7% by year-end according to the CBT’s latest survey.
“Although the large current account deficit constitutes one of the main risks for the Turkish economy, we remain encouraged by the government’s recently-introduced incentive scheme to tackle the structural and long standing current account deficit problem over the long term and also by CBT’s flexible monetary policy over the short-term,” said Güner.
Meanwhile, despite its strong year-to-date performance, the Turkish equity market remains inexpensive, according to Güner, with valuations trading on Price/Earnings Ratios of 10x, which is close to both the five-year historical average and the broader emerging market average.
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HSBC Global Asset Management Disclaimer
The views expressed were held at the time of preparation, are subject to change, and do not constitute investment advice. No liability is accepted to recipients acting independently on its content.
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