Turkey's Inflation Is Wild. Markets Are Surging

Turkey may be the strangest market in the global economy.

Led by strongman President Recep Tayyip Erdogan, the country’s inflation tops 80% and its credit has been downgraded repeatedly, now sitting at high-risk, or junk, status thanks to interest rate cuts. Turkey has more than $16 billion in debt due before 2024, according to Bloomberg.

And still, the $277.7 million iShares MSCI Turkey ETF (TUR) has risen more than 34% this year. That makes it the best-performing total market country exchange-traded fund among all U.S.-listed ETFs.

The closest ETF in terms of year-to-date performance to TUR is the iShares MSCI Brazil ETF (EWZ), which is up nearly 22%. Even oil-producing countries have not fared nearly as well, with the iShares MSCI Qatar ETF (QAT) up less than 11% and the iShares MSCI Saudi Arabia ETF (KSA) up just 6.53%.

Parsing the gains in the Turkish market—which come as the S&P 500 has dropped more than 20%—is to go down a rabbit hole.

The market surge comes amid economic chaos. Despite breathtaking inflation levels, the country’s central bank cut interest rates with Erdogan’s blessing to a benchmark rate of 12%, which ultimately led to the country’s currency tanking. That cut came after several that began last year, and the president indicated in late September he expects single-digit interest rates before the end of the year.

In fact, the Carnegie Middle East Center reported late last year, when inflation was already sky high, that Erdogan believes soaring inflation is caused by high interest rates and that rate reductions will benefit domestic investment and exports.

Multiple Economic Challenges

That said, only a few days ago, Bloomberg reported that the country’s foreign trade deficit expanded 300% on an annual basis in September, and Russia’s invasion of Ukraine has made the country even more vulnerable as commodity prices rise. Indeed, the Bloomberg article notes Turkey has struggled to pay for Russian fuel and imports are accelerating at a steeper pace than exports.

Erdogan has said that inflation is part of his economic plan and that he’ll deal with high inflation early next year.

One possible explanation for the apparently nonsensical gains is that investors are finding protection from the effects of inflation in Erdogan’s interest rate cuts. Local and foreign investors are buying Turkish stocks: Foreigners poured $366 million into Turkish stocks in the week ended Aug. 19, Bloomberg reported, citing central bank figures.

Also, its economy has been growing at around 6% annually for the past 20 years.

U.S. investors don’t seem to be lured in by the market’s outsized performance, even though the broad U.S. market, as represented by the Vanguard Total Stock Market ETF (VTI), has seen a decline of more than 20% year to date, and there are few bright spots among the various asset classes. Rather than gaining investor dollars in 2022, TUR has seen outflows of roughly $72 million.

Contact Heather Bell at [email protected]