Will Scholes, co-fund manager of the Premier Miton Emerging Markets Sustainable Fund, pens a postcard from Turkey and argues “there is no substitute for on the ground research”.
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Nature vs nurture: what makes a country an economic success?
Which factors are most important in determining whether a country grows faster than peers over the long run? A young population? Democracy and rule of law? Education standards? Access to US dollars? Ability to create US dollars? Natural resources? Previously we have written about the powerful role that export manufacturing plays in helping to grow economies sustainably. History suggests manufacturing helps to bring in foreign currency revenues, to grow skills and savings, and most importantly to harness large young populations by offering skilled jobs at scale. But, to borrow a biological phrase, this is ‘nurture’. What role does ‘nature’ play at the national level? This sort of deterministic world view can become controversial very quickly. But, as anyone that has read Tim Marshall’s Prisoners of Geography: Ten Maps That Tell You Everything You Need to Know About Global Politics (or who listened to his excellent keynote at Premier Miton’s 2023 investment conference) will already know, it is only rational that geography plays a powerful role in informing how economies are ultimately organised. Even today in our digitalised world, geography plays a significant role in trade relationships through logistics and sets up advantages and disadvantages in costs of production. The most powerful trading nations tend to find themselves at key nexuses for global transport. Equally fundamental as location is your cost and abundance of energy. The scientist Vaclav Smil would even say that this has been one of the most important factors shaping a society. This cost base underpins the competitive potential of a huge swathe of national GDP when you boil it right down. But this fundamental can change as methods evolve. Consider the UK in the 16th and 17th century as it shifted from wood and biomass to coal-fired power, setting up the Industrial Revolution to come. Or the discovery of shale oil and gas for the US in the 2010s, flipping it from energy importer to energy exporter. It’s an important observation that methods do change, and have always changed, and with the energy transition now underway, we find ourselves at the start of a long-run reshuffle associated with renewable energy generation and energy storage potential. The two – generation and storage – must be kept together, since for renewable generation to become genuinely competitive in the near term we are required to fill the hours when the sun is not shining with any or all of: wind power; geothermal; hydropower; physical storage (such as pumped hydro); and battery storage.A postcard from Turkey: a country in transition
Share of primary energy consumption from low-carbon sources, 2023
Source: Our World in Data, Energy Institute – Statistical Review of World Energy (2024).
How then to think about the long run potential for Turkey? A country with solar radiation figures better than any other country in the G20, except for Australia, but whose solar generation base is smallest. A country where wind generation is competitive if not outstanding, and where geothermal generation is already in the top five countries globally, with only 13% of its potential geothermal endowment currently utilised1.
Next year, energy storage additions are expected to take off in earnest, with incentives to drive installations being formalised, and a legal requirement that new renewable capacity be paired with energy storage. To be clear, Turkey doesn’t have gas reserves and its base of hydropower has become less reliable of late, so costs of electricity are not outright low compared to Emerging Market peers. But the potential for renewable generation here is great, and only now is related investment kicking off in earnest. What is more, Turkey faces none of the regulatory bottlenecks of Europe when it comes to new grid connections. In fact, the government has set some ambitious targets to this effect: to reach a 50% share of renewable energy by 2030 and 80% by 2053. If you model a future in which carbon is fully priced – as it ought to be – this diversified renewables mix starts to look compelling.
1 https://www.geothermal-energy.org/pdf/IGAstandard/WGC/2020/01049.pdf
A European Mexico?
In June this year, we visited Turkey for the first time in six years. This is an unusually long hiatus for a major Emerging Market without it having either been downgraded to Frontier status or collapsed into unrest or war. In that interim, there have been powerful short-term equity rallies that we have missed. We were tempted back by the promise that the process of disinflation was underway, and the political dynamic more balanced than it had been in a decade at least. Both are true, to an extent.
Month on month inflation in June came in lower than expected, albeit it still leaves the 12-month trailing number at more than 70%. And there is a sense that the political mood is less oppressive and policy-making more consistent, albeit this is not the same as healthy debate being restored. And, to underscore just how tentative these improvements are viewed, repeatedly we were told that our typical five-year investment horizon was not appropriate; we might consider two years maximum if we were to find any opportunities during our visit. Equities here are a ‘trade’ not an investment, seemed to be the message.
In some senses Turkey has always been a trading market: it is an economy characterised by the import of intermediate goods. Cottons are made into textiles, aluminium and parts sourced from Asia made into white goods, and these are then sold into a nearby (typically European) consumer market.
That reliance on imports to fund its production, combined with a growing population, has always made it hungry for foreign currency. In turn, that means bouts of inflation when the Lira comes under pressure and those imports become more expensive. And, of course, the Lira has come under pressure an awful lot: populist, unorthodox policy by the AKP government under President Erdogan must shoulder the blame for the lion’s share of this. Domestic households are wise to these vulnerabilities, and hold US dollars where and when they can, which of course compounds the problems of weakness in the domestic currency.
All of which is to say, Turkey’s problems are deep-rooted, and absent a change of government, investors – be they foreign or domestic – will continue to mistrust policy. But what it also means is that some influences of nurture work their way into DNA, and Turkish companies have evolved with a capacity to weather inflation as well as any private sector around the world. Economists continue to be surprised at how economic activity has held up in Turkey, even with interest rates currently at 50%.
Finally, this setup also means that expectations are ultra-low, and investor positioning near zero. To be clear, this does not mean that we expect Turkey to sail through its current economic challenges. A familiar refrain was that disinflation from 70% to 40% in 2024 was likely to prove far easier than from 40% to 20% the year after. This last mile is where we expect to see the greatest pressure on households, and therefore the greatest risk of policy backsliding to the populist days of old.
But the rest of the world has also changed in the last six years. Nearshoring and protectionism are now daily policy realities. Investment in grids and distributed sources of energy has skyrocketed. The European Union’s carbon border adjustment mechanism (CBAM) is now looming. Turkey for its part has a clean energy mix, with scope to get cleaner still as discussed above, which should deliver an advantage vs trade competitors in carbon adjusted terms. Logistically it is already at an advantage in selling into Europe.
Variously we heard management teams refer to Turkey positioning itself as China, or Mexico of Europe, but sales to the Middle East and North Africa are also booming. These factors have the potential to boost the export economy even as the domestic one slows, all of which ought to be positive for the country’s current account and by extension help inflation to slow, the currency to strengthen, and reserves to swell. This is the ‘buy’ case, and a gross simplification of Turkey’s problems, but there is at least something to work with.
There is one last positive that bears mention. This is a very top-down assessment and as such strays from our preferred approach, which continues to be ‘bottom-up’ fundamental research. For that we make no apology: the macro has repeatedly trumped the micro in Turkey for many years, and sustainable improvement in the top-down picture must be the first hurdle we, as a true long-term investor, must clear.
None the less, we were there to meet corporates, not policymakers. We spent three days in Turkey seeing 13 companies. Of these, eight have no international research coverage. Two had no third-party research coverage at all. Of the five covered by international banks, two were covered by HSBC alone, who organised our trip.
In Turkey, as in all emerging markets, there is no substitute for on-the-ground research.
