If you have only a nodding acquaintance with the headlines out of the Caspian region, and you fancy yourself as a true contrarian, you might be tempted by Turkey.
First: There’s the blazing headline (top story on the Financial Times app): “ECB concerns grow over EU banks’ Turkey exposure as lira slides”. For contrarians, that’s like honey for a bee: “People think things are about to collapse? Great! How quickly can I invest?”
What’s been going on
Thanks to its location straddling eastern Europe and western Asia, Turkey has long been known as the “gateway to the Middle East”. Turkey is a member of NATO and has long been an ally of the U.S. and Israel. As a result, it’s suffered heavy criticism from neighbouring Muslim countries (Turkey itself is 98 percent Muslim). But Turkey’s relationship with the West has been deteriorating.
The country’s president, Recep Tayyip Erdogan, has been in power since 2002. His party, the Justice and Development Party (AKP) was initially viewed as a bridge between Islam and democracy.
But Erdogan has since focused on obtaining more and more power. In June, he was re-elected (in an election that was tightly controlled so he was sure to win) president for another five years and with expanded powers. Now Erdogan has the right to dissolve the parliament, rule by decree and have greater control over the judiciary.
Erdogan hasn’t had an easy time – due in part to his own policies. “Turkey is in the midst of a currency crisis largely of its own making,” Bloomberg said (back in May), stemming in part from policies resulting from Erdogan’s “long-held, very unorthodox belief that high interest rates cause rather than curb inflation”. Last month, he installed in son-in-law as the new finance minister, a post he’s wholly unqualified for. Erdogan blames external forces rather than his own bad policies.
Meanwhile, the country’s relationship with Europe and the U.S. has turned sour. In the latest chapter, Turkey detained a U.S. pastor for alleged espionage… and the U.S. has imposed financial sanctions against Turkey’s minister of justice and the minister of interior for participating in the detention of the pastor. And the U.S. is weighing imposing more sanctions against Turkey.
Markets vote “no”
That all sounds bad. So it’s not a surprise that the stock market is hitting 10-year lows… the biggest New York listed ETF (ticker: TUR) is down 39 percent over the past three years, and 42 percent in 2018 so far. Turkey’s stock market trades at a CAPE (or Cyclically Adjust Price to Earnings ratio, which measures stock prices over a ten year period, adjusted for inflation) of 9.4… low enough to make it one of the world’s cheapest markets (the S&P 500 is at a CAPE of 30.2… Singapore is at 13.4… and Hong Kong is at 16.6, by comparison).
If a currency is the closest thing that markets have to a real-time vote about the prospects of a country, Turkey is a landslide loser right now. The lira has fallen 60 percent against the U.S. dollar in 2018 so far. And Turkey’s 10-year bond recently fell to a record low.
Buy when things are bad, bad, bad – right?
Things are bad in Turkey. And, from the surface, it’s a contrarian’s dream. All that bad news… all that selling… it can’t be that bad. And… the law of mean reversion means that Turkey is going to bounce back soon. Anything that’s down that much is going to come back, right?
At its core, defying the conventional wisdom – the know-it-all on CNBC, the taxi driver who passes on his hot stock tip – is what contrarian investing is all about. It’s defying everyone else and conquering your gut instinct, which is telling you to run in the opposite direction.
And in particular, it’s the belief that when everything seems pitch-black, when there’s “blood on the streets,” and when everyone else is selling… that’s the time to buy, because things can’t get any worse. And then they get just a bit better, and the brave investor makes a killing.
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But sometimes, bad is just… bad
But some investors take contrarian investing to an extreme. They interpret any bad news, or market correction, or stock decline, or literal blood on the streets, as good news in disguise.
That kind of attitude – knee-jerk contrarianism – is a great way to lose a lot of money, because sometimes – and maybe even most of the time – the boring, plain, they’re-all-saying-it conventional wisdom is, in fact, correct.
And I think that that’s the case with Turkey right now.
Yes, there may be a bounce. Erdogan might do something that isn’t openly antagonistic. Beaten-down Turkcell (New York ticker TKC) might catch a bid. But at best, six months from now things are going to be as bad, if not worse.
Erdogan isn’t going to be president of Turkey forever. But for investors, a presidential term may feel like forever. And Erdogan’s macroeconomic policies, and geopolitical positioning, suggest that will be like purse-snatcher mace to investors tempted to invest in Turkey. Chances are that Turkey is on the way to being a value trap like Russia… if it isn’t already.
Will Turkey get worse in the short term? I don’t know. But I do know that as soon as politicians or regulators suggest that the market is “wrong” and that everything is all right (I call this the “Yeltsin rule”… I wrote about it here), things will only get worse.
And the Turkish finance ministry did just this when they said yesterday (according to the Financial Times), “Contrary to the speculative statements being made in the market about our banks and our companies, our regulatory institutions do not see a problem posed by the exchange rate or liquidity risks.”
Sometimes contrarian investing is a great idea. Other times… it’s a terrible one.
Publisher, Stansberry Churchouse Research
P.S. Contrarian investing, when done right with the help of deep familiarity with the markets and thoughtful research, can be profitable despite the risks. But investing in expanding economies, well-established market trends, and profitable companies that don’t have to worry what the government is going to do tomorrow is an even better formula for earning meaningful – sometimes life-changing – returns from stocks.
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