Investment guru to go down in history

Investment guru to go down in history

He surely has made a lot of money, but investment guru Mark Mobius has now made history. Speaking to state-run press agency Anadolu Agency, he said that Turkey’s economy was not fragile.

The executive chairman of the Templeton Emerging Markets Group, who was already investing in EMs (emerging markets) before I was born, stated that Turkey’s economy was “very vibrant, with a well-trained and educated workforce” as well as “excellent managers, capable of entering global markets effectively.” 

“Therefore we cannot say that it is fragile,” he added.

That would be the impression you would get of the country’s workforce if you got shuttled from meeting to meeting around Maslak with the very educated minority. In fact, Turkey’s best students score higher than the best students in Singapore in international exams, the country with the highest marks, while the worst score lower than the worst students in Morocco and Ghana, which sit at the bottom of the rankings. On average, Turkey’s workforce has lower education however you measure it, compared to countries with similar levels of GDPs.

In any case, Turkey has been labeled fragile not because of its long-term potential, but short-term economic risks, such as its dependence on hot money and high external financing requirements. Therefore, economists usually believe that Turkey is one of the countries that will be affected the most by the U.S. central bank Federal Reserve’s approaching rate hike.

Mobius begs to disagree: “The perception of risk is rather low since the idea of an interest rate hike has already been discounted by the market. The expectation is that, if a rate hike comes, it will be small. The real risk comes if the interest rate hike is large, and larger than expected. In that case, all markets, including emerging markets, will be impacted.”

He may be underestimating the impact of such a larger-than-expected rate hike. Academic research consistently finds that sharp spikes in volatility are the biggest single driver of EM financial stress. In fact, outflows from EMs have already been gaining pace despite record-low volatility - and Turkey is no exception. There have been net outflows from both Turkish equities and bonds for the past three weeks.

There are of course two other factors elevating Turkey’s economic risks: Early elections and terror. Both would not only cause hot money to flee the country, they would also bring domestic investment and spending to a halt. The latter could also ruin tourism, forcing your friendly neighborhood economist, who moonlights in the sector in his spare time, to return to being a market economist.

If the Justice and Development Party (AKP) were aware of the danger, they could be a little more willing, despite President Recep Tayyip Erdoğan’s eagerness for reelections, to form a coalition with the Republican People’s Party (CHP). However, according to pro-government newspapers, they are thinking along the same lines as Mobius. That may be why they are not very eager to form a coalition in the first place. They are probably steering Turkey towards a perfect storm.

And Mobius’ remarks will probably go down in history being as unfortunate as those of the sailor on the Titanic who had claimed that the ship was unsinkable - or the French general who had declared the Maginot Line impenetrable.