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Turkey; Bargain Or "Watchlist For Now"?

|Includes: iShares MSCI Turkey ETF (TUR)

This is not a quantitative article. I'll write about what I see, first hand, which definitely isn't enough to establish a statistically significant view, but my aim is to introduce skepticism about the idea that Turkish stocks are a "bargain" for the risk loving investors/traders, as have been suggested by several authors on Seeking Alpha.

- "Bargain" seems to have been overly tied to "price action outside of a usual range". A security having gone above or below its usual range, by itself, means absolutely nothing but that, for anyone with a longer investing time horizon than a day or two.

1) Current USD denominated debt of the private sector is big. Input costs have gone up (due to the low buying power of the TRY) so much that the depreciation of the currency is past the point of diminishing returns, in terms of exports and debt servicing. Also worth noting is that the longer the TRY currency stays weak, the more damage is inflicted on the private sector (and consequently on banks, through possible loan losses). So the longer Turkey stays in turmoil, harder it will be to come back (and longer it might take).

Pre-Coup Attempt:

Post-Coup Attempt:

2) Real-estate is at a halt (residential and commercial) in Istanbul.

3) There's a massive influx of refugees (~3m), saturating the job market. Those 3m refugees add to "low quality demand"; they aren't exactly on a spending spree, being more focused on simply surviving. If you net out the government benefits they're provided with, the tax loss of the govt due to illegal labor they provide, the loss on the pension side for that same reason, the tax&pension losses from Turkish citizens losing their jobs to cheaper, illegal labor + the spending reduction in accordance with overall lower legal employment, the effect of that "additional 3m demand" would be, I suspect, quite negative.

4) The political pressure to reduce rates (to prop-up the real-estate markets and to maintain affordable credit lines to businesses), with the FED on an upward looking rate path, isn't setting the scene for a TRY recovery.

5) National security and political concerns affect tourism, one of the critical bloodlines of the Turkish economy, which has been struggling (to say the least), since the airport bombings and the coup attempt.

My concern is not "if" it happens, but "what if" it does and the expected value of a long TUR trade looks dim at this point. I do think there's tremendous potential in Turkey, with its young population and growing domestic demand, but I don't think now is the right time to invest. I would not go long TUR, at least until Trumponomics are clearer, so that we can get a better idea of the likely path of the FED rate moves (i.e. the USDTRY parity).

Disclaimer: I'm short TUR and am likely biased; discount my statements accordingly.

Disclosure: I am/we are short TUR.