Turkey squeezes rates and stocks rally
Despite Turkey’s political mess, the central bank knows what it is doing
Turkey’s stock market is one of the world’s best-performing large markets year to date, with the benchmark XU100 Index returning 14% in US dollar terms. Late in 2016 the Turkish lira was in free fall, and Turkish stocks hit their lowest point since the 2008 financial crisis. Turkey’s outlandish president Recep Tayyip Erdogan barely survived a coup attempt last July, and has picked a high-profile fight with a number of European countries. On the surface Turkish governance looks miserable. But the country’s central bank is highly professional and competent. It executed a classic liquidity squeeze, pushing up short-term interest rates to regain the confidence of the currency markets. The test of success is the inversion of the yield curve: long-term interest rates fell while short-term interest rates rose. Investors, that is, believe that Turkey’s position will improve over the long term even though the central bank is restricting credit in the short-term. Turkish stocks are selling at just nine times earnings and still look cheap.