Against a backdrop of widespread emerging market underperformance in 2018, Turkey has been particularly painful for equity investors. The Turkish stock market has fallen over 50% in euros year-to-date as rising inflation, currency weakness and political instability have combined to provide a sharp reminder of the risks faced by investors in developing countries, especially those with high levels of foreign debt.
Amid growing concerns that the Turkish turbulence could destabilise emerging and developed markets more broadly, portfolio managers of the Kon-Tiki, Vekst and Focus funds recently visited the country to hear from fifteen companies, including several of our holdings, and assess the risk of wider contagion.
“Our trip generally confirmed many of the market’s concerns about the sustainability of Turkey’s growth model with the country suffering from a significant twin deficit, which has been exacerbated by the recent devaluation of the lira”, explains Kon-Tiki Portfolio Manager, Fredrik Bjelland. “This has also created a major headwind for Turkish corporates, many of whom have taken on significant levels of dollar or euro-denominated debt because of lower interest rates and who now face re-financing risks.”
At the end of August SKAGEN Kon-Tiki had the largest Turkish exposure among our funds with 4.1% of its portfolio invested across three companies; Sabanci Holding (2.0%), Anadolu Grubu (1.2%) and Enka Insaat (0.9%). Focus had 1.2% Turkish exposure through its position in KOC Holding, while SKAGEN Vekst had 0.5% of its assets invested in Turkey via small positions in Enka Insaat (0.3%) and Anadolu Grubu (0.2%). Neither SKAGEN Global nor SKAGEN Insight currently have any exposure to Turkish companies.
As stock-pickers with a focus on value, we constantly assess our portfolio companies’ return potential relative to both the risks they face – including those form geopolitical and macroeconomic events – and alternative investment opportunities elsewhere. The portfolio teams have been monitoring the situation in Turkey for several years and will continue to keep a close eye on events in order to optimise the overall risk / reward of the portfolios.
The Focus team took advantage of the Turkish market weakness to invest recently in leading investment company KOC Holding at a steep discount, as Portfolio Manager, David Harris explains: “The visit confirmed our investment thesis of a solid and undervalued asset base managed by best-in-class capital allocators. Group management has proactively worked with its subsidiaries to prepare for the downturn and enable them to take advantage of opportunities.” Among our other funds' current holdings, consumer staples group Anadolu Grubu currently trades below asset value and should hopefully be able to pass on expected price rises while Enka Insaat has benefited from a weaker lira due to net overseas cash balances.
While the political situation in Turkey remains uncertain, there are signs of a thawing in the tensions between President Erdogan and Donald Trump over the detention of an American pastor which led to US sanctions and sparked the most recent equity market sell-off. The two leaders met at the UN and rumours of Andrew Brunson’s possible release boosted the lira by 4% and could potentially sow the seeds of a further recovery.
With the Turkish index currently trading on a forward P/E of 5.7x – 50% below emerging markets and at a 63% discount to developed ones – there will inevitably be opportunities for investors when the time is right. This is particularly the case for stock-pickers like SKAGEN who can cherry-pick the most attractive companies, as Bjelland concludes: “Turkey will no doubt present some fantastic investment opportunities for long-term investors as the downturn unfolds and this trip has gone a long way to improve our understanding of where these opportunities may arise.”
 Source: MSCI as at 30 September 2018 (-51%)
 All portfolio Information as at 31 August 2018, percentages represent weighting in SKAGEN’s funds
 Source: MSCI, as at 31 August 2018
Except otherwise stated, the source of all portfolio information is SKAGEN AS as at 31 August 2018. Data has been obtained from sources which we deem reliable but whose accuracy is not guaranteed by SKAGEN.
Statements reflect the writer's viewpoint at a given time, and this viewpoint may be changed without notice. This article should not be perceived as an offer or recommendation to buy or sell financial instruments. SKAGEN AS does not assume responsibility for direct or indirect loss or expenses incurred through use or understanding of this article. Employees of SKAGEN AS may be owners of securities issued by companies that are either referred to in this article or are part of a fund's portfolio.