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Turkey’s serene waters make it a popular holiday destination, but behind the scenes, its economy faces turmoil. However, international investors are optimistic as President Recep Tayyip Erdoğan takes steps to address these issues.
Erdoğan’s recent appointments of Mehmet Şimşek as finance minister and Hafize Gaye Erkan, a former Wall Street banker, as the head of the central bank have been well-received. Further, the appointment of three new deputy governors demonstrates a shift towards economic orthodoxy.
Positive actions have followed these encouraging developments. Two consecutive interest rate hikes have doubled the rates to 17.5 percent. Despite this increase, it still appears low given the high inflation rate of nearly 40 percent.
The Turkish stock market has experienced a rally of over 55 percent in local currency terms since its low point in May. In terms of dollars, this translates to a rise of more than 14 percent. Foreign investors have cautiously entered the market, investing $1.6 billion since early June.
Turkey has the potential to become an economic powerhouse due to its favorable geographical location on the border of Europe and its large population of 85 million people. The country is home to world-class companies like Turkish Airlines and conglomerate Koc Holdings. Despite the recent surge in stock market value, the price-to-earnings ratio remains relatively low at about five times forward earnings, making it one of the cheapest markets globally.
If Turkey continues to embrace economic orthodoxy, its stock index may deserve a higher earnings multiple than it currently holds.
However, theory and practice may not align. Erdoğan, being unpredictable, introduces uncertainty. It remains unclear whether he will prioritize raising interest rates, especially considering the sluggish economy. While Turkey holds promise, investing in Erdoğan’s economic decisions requires boldness.
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