Setting Expectations With Turkey and Greece

Turkey and Greece offer a timely reminder to separate hype from reality.

A week into summer and moods are warming toward a couple parts of the old Ottoman Empire: Turkey and Greece. These Emerging Markets have a limited global market presence, but every now and then they illustrate key investment lessons. Here is a big one they show now: Monitor how expectations align with reality. When the former outpaces the latter, disappointment tends to follow—a factor worth keeping in mind given recent buzz.

A Turkish Delight for Investors?

After Turkish President Recep Tayyip Erdogan won last month’s general election, extending his 20-year reign by another 5 years, many wondered if big changes were coming after the closest opposition challenge in recent memory. On that front, Erdogan’s new appointments seemed to cheer investors. His naming internationally respected economist Mehmet Simsek and former US bank executive Hafize Gaye Erkan as finance minister and central bank governor, respectively, stirred hope of a pivot to more traditional economic policies (and away from the unorthodox view that high interest rates cause inflation). Expectations were high leading up to the Central Bank of the Republic of Turkey’s (CBRT) June meeting, as some projected the doubling, tripling or even quadrupling of its benchmark interest rate in response to sky-high inflation (which clocked in at 39.6% y/y in May).[i]

Given those predictions, last Thursday’s 650 basis-point hike from 8.5% to 15% disappointed some. Other recent moves suggest the CBRT favors incremental changes over dramatic measures, as it tweaked, rather than dropped, some rules that artificially propped up the lira. For example, Turkish banks have to hold lira-denominated bonds amounting to a certain percentage of their foreign exchange deposits—and the CBRT dropped this “securities maintenance ratio” from 10% to 5%. Domestic financial institutions also must pay a higher maintenance requirement if lira-denominated securities were less than 60% of total deposits—now the threshold is 57%.

In response to these moves and the news the CBRT no longer appears to be using reserves to defend the currency, the lira fell to a record low against the dollar earlier this week. This isn’t surprising: Policymakers removed their support for the currency, and rate hikes have a way to go before meeting markets’ expectations. That said, the lira’s weakness isn’t a secret: It is down -25.3% relative to the dollar year to date and has steadily weakened for the better part of the past decade.[ii] Markets are well aware of Turkey’s long-running economic issues. (Exhibit 1)

Exhibit 1: The Lira in the Erdogan Era


Source: FactSet, as of 6/26/2023.

Looking ahead, conventional economic policies aren’t a given in Turkey, even with Simsek and Erkan at the helm. Simsek has said the Treasury and Finance Ministry will take a gradual approach in order to reduce the risk of disruptive side effects, implying more measures to restore normal market functioning are in store. That is possible, but what matters for markets is how reality meshes with expectations. Erdogan has a history of changing his mind and replacing policymakers that didn’t play by his book. Consider, over the past five years, Erdogan fired three central bank governors; installed his son-in-law as finance minister (who later resigned, ostensibly due to health reasons); and sacked a finance minister for publicly opposing CBRT rate cuts. Erdogan even axed the head of the state statistics agency for reporting record inflation.[iii] If expectations for “normal” economic policy in Turkey get too hot relative to even mild progress, that could tee up disappointment for markets.

What to Make of a Greek Revival

Greece has a new government after conservative New Democracy took 40.5% of the country’s second national vote in as many months on Sunday, as incumbent Prime Minister Kyriakos Mitsotakis’s decision to dissolve parliament after winning May’s election paid off. Under the new electoral system, winning parties that pass the 40% threshold receive bonus parliamentary seats—so New Democracy looks set to take 158 seats in the 300-seat parliament. The new majority government was sworn in Monday, and voter and investor expectations seem high. As one Greek pensioner put it, “I expect a lot (from the new government) … The main thing is the health system, the economy, so we can live (decently) because things are difficult.”[iv] Similarly, in the investing community, some hope a Mitsotakis government will continue to push reform progress and put the nation on track to reclaim an investment-grade rating on its debt.[v]

However, in our view, forward-looking markets have likely pre-priced much of this hope already. Greek stocks are up 37% year to date, vastly outpacing broader Emerging Markets (4.7%).[vi] With the bar so high, can the government meet lofty expectations—let alone exceed them? Time will tell, but governments with outright majorities don’t necessarily pass everything they promise on the campaign trail. The Hellenic Republic can look to the French Republic for that lesson, as President Emmanuel Macron’s huge coalition majority in 2017 didn’t yield major legislative change.

[i] Source: FactSet, as of 6/28/2023.

[ii] Source: FactSet, as of 6/26/2023. Statement based on change in USD per Turkish lira, 12/31/2022 – 6/25/2023.

[iii] How is that for shooting the messenger?

[iv] “Greek conservatives storm to victory in repeat election,” Renee Maltezou and Angeliki Koutantou, Reuters, 6/25/2023.

[v] “Greek Assets Surge as Vote Puts Nation on Path to Credit Upgrade,” Aline Oyamada, Bloomberg, 5/22/2023.

[vi] Source: FactSet, as of 6/27/2023. MSCI Greece Index and MSCI Emerging Markets Index returns with net dividends, in USD, 12/31/2022 – 6/26/2023.

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