There’s still value in select Turkish assets, fund manager says. Here’s where to find it 

  • As Turkey's currency crisis continues, most recently jolted by sanctions and tariffs issued by Washington and Ankara on one another, investors are largely steering clear of Turkish assets.
  • But there may still be value in export-driven firms, and this could increase as many Turkish companies resort to exports to pursue growth and bring foreign currency into the country, according to an investment manager.
  • Risk in Turkish equities remains high while valuations are extremely low. Turkey's benchmark BIST 100 Index has fallen 22 percent since the year's start.
People check currency exchange rates at a currency exchange office on August 11, 2018 in Istanbul.
YASIN AKGUL | AFP | Getty Images
People check currency exchange rates at a currency exchange office on August 11, 2018 in Istanbul.

As Turkey's currency crisis continues, most recently jolted by sanctions and tariffs issued by Washington and Ankara on one another, investors are largely steering clear of Turkish assets.

But there may still be value in export-driven firms, and this could increase as many Turkish companies resort to exports to pursue growth and bring foreign currency into the country, according to an investment manager.

"We do find value strategies, attractive names, especially in firms that are export driven, that have U.S. dollar revenues and quite resilient earnings dynamics, despite the lira weakness," Emmanuel Hauptmann, senior equity fund manager at RAM Active Investments, told CNBC on Wednesday. "So the dispersion we have currently and the massive sell-offs lead to a selective few value opportunities."

Turkey was a favorite of emerging market investors until recently, offering pro-business policies, a fast-growing youth population and an average of 7 percent economic growth per year under President Recep Erdogan's tenure. Foreign investment increased from hundreds of millions of dollars per year prior to Erdogan's rule to an average of $13 billion a year.

But today's situation is starkly different.

'Selective opportunities'

"We've seen a decrease over Turkish exposure in the last 12 months, but we still hold a slight overweight relative to the index currently," said Hauptmann, whose Switzerland-based boutique firm oversees $5 billion in assets under management.

"Risk in Turkish equities will obviously remain very high in the coming months," he added, but stressed that "current extremely low valuation levels does create selective value opportunities."

RAM Active Investments is more exposed to Turkish consumer discretionary and industrial sectors, while less exposed to banks, many of which will struggle to borrow and repay their foreign currency-denominated debt thanks to the lira's depreciation.

One could say it's fairly brazen to hold onto some Turkish assets, given the ongoing sell-off triggered by months of poor monetary policy, a soaring current account deficit, disproportionate reliance on external financing and a now-open spat with the U.S., all of which have contributed to the Turkish lira's nosedive.

The currency has dropped more than 40 percent against the dollar since the start of this year, and Turkey's benchmark BIST 100 Index has fallen 22 percent in that time.

"In our low-risk and growth books we hardly have any Turkey (exposure), so just in (terms of) value we find these selective opportunities," Hauptmann said, acknowledging that his firm's overweight position on Turkey is in the minority. "Most investors in emerging markets are more growth driven, you tend to have very few of our peers with exposure there currently."

'We have to produce more'

Erdogan has proposed an export-led growth drive as a solution to the current morass, saying in a speech Tuesday, "We have to produce more, we have export more, export, export… We are going to produce better quality goods domestically that we currently import, and we are going to export them."

And this may be a survival strategy for many Turkish companies, according to Michael Harris, founder at Cribstone Strategic Macro.

"[Companies] are going to lose domestic sales and switch to exports," he told CNBC's "Squawk Box Europe" on Wednesday. "They're going to fire people, cut costs, do everything they can to sustain their business. But the ability to grow beyond that requires Turkey to have export-driven growth."

Harris blamed Turkey's financial woes on "laziness" and a lack of regulation, stressing that ultimately, investors needed a monetary policy toolkit that inspired confidence. Erdogan has been criticized for not allowing the central bank adequate independence to raise interest rates despite an overheating economy and inflation now exceeding 15 percent.

Two of Turkey's largest industry bodies issued a statement Tuesday urging "tighter monetary policy" in a rare show of dissent from government practice. Turkish banks and companies also hold significant dollar and euro debts, making borrowing and financing particularly painful as the lira weakens. Foreign currency-denominated corporate debt is 35 percent of gross domestic product (GDP).

The lira hit a record low of 7.24 to the dollar Monday on the back of increased U.S. tariffs on Turkish steel and aluminum, imposed by the Donald Trump administration over Ankara's continued detention of American pastor Andrew Brunson. Brunson was arrested in 2016 on espionage charges that he denies.

Diplomatic meetings have failed to produce a solution, and a Turkish court ruled Wednesday against Brunson's appeal for release. The lira was trading at 6.1070 to the dollar Wednesday at 4:15 p.m. Istanbul time (8:15 a.m. ET), rallying from its earlier low after banking authorities pledged to provide liquidity and placed limits on bank swap transactions shorting the lira.

Erdogan has framed Turkey's financial instability as a result of "economic warfare" by the U.S., and is hitting back with tariffs on a number of U.S. goods including cars, alcohol and tobacco. He has implored Turks to buy lira as part of a "national struggle" and pledged a boycott of U.S. electronics, including Apple's iPhone.