Thoughts from a Renaissance man Economics & Strategy

4 February 2020

Charles Robertson +44 (207) 005-7835 [email protected]

Mobile +44 7747 118 756 @RenCapMan

Vikram Lopez +44 (207) 005-7974 [email protected] Thoughts from a Renaissance man Turkey upside growth surprise in 2020/2021

A cheap currency can help lift exports while interest rate cuts lift domestic demand, providing an opportunity for Turkish growth to reach 5% in 2020/2021.

There’s a lot tailwinds for Turkish macro in 2020

A combination of factors are supporting Global Head of Equity Strategy Daniel Salter’s Overweight on Turkey this year. Externally, low interest rates from the European Central Bank and the Federal Reserve are once again a good reason to look at a country that over three centuries has often imported capital to support growth. The balanced current account (C/A) is a rarity in Turkey’s history and means a rapid pick-up in growth should not worry investors in 2020 (and 2021 if our forecasts are right). The TRY is the second cheapest in emerging markets after Argentina and should limit C/A widening in 2020, helping with trade and also by encouraging tourism receipts.

We also expect Turkey to benefit from rising labour costs in Central Europe. The customs union with the EU guarantees trade access to the EU. The gross minimum wage is about 70-95% of Central European levels. The manufacturing base has a long track record. We expect FDI to continue flowing to Turkey. Meanwhile falling local interest rates mean that domestically financed investment can pick up too, while we expect European banks to continue rolling over (and perhaps expand) lending to Turkey. The banks and corporates in Turkey showed again in 2018, as they did in 2008, that however volatile the economic environment, they are reliable partners for Europe’s lenders to interact with.

In the very short term, Turkey also gets a lift from the China-induced weakness in the oil price.

We think the undervalued TRY can limit C/A deterioration

Taken together, we continue to see a decent chance of Turkey achieving the 5% GDP growth in 2020 that the government is targeting, in excess of the consensus target of 2.8%. This is premised on household consumption rising by 2.4% (consensus expects 3.4%, which we believe is possible), government consumption rising by 4.9% (consensus assumes 2.5%), investment rising 6% (consensus sees just 2% growth), and the C/A slipping from a $1bn surplus in 2019 to a $5bn deficit in 2020 (consensus expects $11bn). We also expect a 5-6% growth rate in 2021.

The penalty may be paid for via stubborn inflation and nominal TRY depreciation

Last year, we suggested Turkey had a choice of either export- and investment-led growth, or more bank lending supporting consumption but at the expense of the C/A. The authorities appear to favour both at the same time – boosting exports by keeping the currency on the very competitive side of fair value – and lifting investment and consumption via interest rate cuts. This means that reducing inflation has to come second to the growth target, and we assume only a modest fall in headline CPI from 12.0% in January to 9.9% by December 2020. To keep the currency competitive will therefore require some modest nominal depreciation and we forecast TRY5.95/$ in 2019 to TRY6.3/$ in 2020 and TRY7.0/$ in 2021.

Portfolio positioning is light

Investor positioning in Turkey appears to be light. In 2019, there were net outflows on the debt market and modest $0.4bn of inflows into equities. As recently as 2017 portfolio inflows were $24bn. We suspect 2020 inflows will be closer to 2019 than 2017.

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Renaissance Capital 4 February 2020

Thoughts from a Renaissance man

One of Turkey’s advantages is a minimum wage that is below that of Central European competitors such as Poland or Romania. For this reason we still expect VW to choose Turkey rather than another location, if it goes ahead with a new factory in 2020 – the decision is due in February 2020. Over the coming decade, Central Europe’s shrinking workforce is going to pressure wages higher. Poland’s PiS won the 2019 election on a promise to raise the minimum wage to $1,000 in 2023.

Figure 1: Minimum wages in dollars, January 2020 (or latest available) at 4 February 2020 exchange rates Minimum wage in $ based on 4 February 2020 exchange rates - Eurostat and many other sources via Renaissance Capital, note data on right-hand side may be mix of gross or net wages (not so reliable) 2,000 1,838 1,816 Shrinking workforces 1,775 1,758

1,800 1,708 are driving up Central European wages Blue = EM 1,600 Green = FM Poland's PiS promsing rise * = avg mix of min wages 1,400 (txlt) = textile workers

1,242 to $1,000 by 2023

1,166 (gl) = general labourer 1,200

1,045 Romania is probably not 1,000 competitive with Hungary In March 2018, 841

823 Turkey was $536 800 above Hungary Russians now as cheap 674 678 644 638 606

648 as the cheapest Chinese 541 517

600 492 province 477

446 India around 381 377 354 346 $100-200 295 400 289 279 250 245 193 191 190 189 182 175 161 147 145 143 127 114 112 109 103 94 93

200 83 79 53 22 0 UK US SA* Spain Latvia Brazil Egypt Serbia Ireland France Poland Croatia Estonia Russia Ghana* Mexico Tunisia Greece Czechia Zambia Bulgaria Ukraine Slovakia Romania Portugal Vietnam* Lithuania Germany Slovenia Pakistan Morocco* Argentina Colombia Indonesia* Kenya* (gl) Kenya* Azerbaijan Ivory Coast Ivory Netherlands (govt) Bangl Kazakhstan China (Heil.) China Ethiopia (txtl) Ethiopia Iran (parallel) Iran Banglad. (txtl) Banglad. Jordan (2018) Jordan Turkey (Gross) Turkey Georgia (Tbilisi) Georgia Lebanon (2018) Lebanon Hungary (unskill) Hungary China (Shenzhen) China Nigeria (NGN30k) Nigeria Note: Wages data can be gross, or an average of regional or sectoral wages Source: Eurostat, Google searches

To highlight the underlying cause, we compare Turkey (one of many countries with a rising workforce) with those developed, emerging or frontier countries with a declining workforce.

Figure 2: Turkey’s working age population will keep increasing as Central Europe’s shrinks Working age (15-64) population annual % change 2020-25, UN projections via Renaissance Capital DM EM FM Beyond 1.0 Red = Developed markets Blue = Emerging markets 0.5 Green = Frontier markets Yellow = Beyond Frontier 0.0

-0.5

-1.0

-1.5

-2.0 Italy Chile Spain China Korea Japan Serbia Turkey Russia France Austria Poland Croatia Taiwan Finland Greece Estonia Belarus Ukraine Georgia Belgium Armenia Portugal Hungary Moldova Thailand Slovenia Lebanon Romania Mauritius Lithuania Germany Singapore Hong Kong Hong Netherlands Czech Republic Czech Note: Turkey's working age population is still growing by 0.5% a year Source: UN

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Not only is Turkey’s working age population still growing, but it also has room to increase labour force participation by drawing more women into the workforce. Turkey is at least a decade ahead of North Africa in this regard, and over 10-20 years, we assume it will approach European and Asian levels of labour force participation. The combination of a rising workforce and rising participation should help keep wages competitive.

Figure 3: Turkey has room to increase labour force participation by 10-15 ppts

Unemployment rate (2018, IMF) vs Labour Force Participation Rate (2018, ILO estimate) - via Renaissance Capital

30

South Africa 25

Nigeria

20 Greece Problem Jordan Armenia corner if population Tunisia is shrinking 15 Spain Wage inflation Iran Serbia or Low Female Brazil Immigration Participation Rate Egypt Turkey or Italy Croatia 10 Morocco Colombia Higher pension Argentina France Unemployment rate (2018, IMF) (2018,rate Unemployment Ukraine age Chile Portugal Peru Pakistan Mauritius Ireland Lithuania Philippines Indonesia Slovenia Estonia 5 Romania Russia Sri Lanka Korea US UKKazakh. Mex China Germany Switz. Hungary HK Czechia Malaysia Singp. Vietnam Poland Japan Thailand Belarus 0 40 45 50 55 60 65 70 75 80 85 LFPR, ILO estimate, 2018

Note: Turkey has room to increase labour force participation by 10-15 ppts Source: ILO, Bloomberg

On growth, our work on demographics1 shows that Turkey should grow by 4.7% annually over 2020-2025, before slowing to 3.8% for 2025-2030. Turkey’s growth since 1960 has been nearly exactly in line with our demographic model, but it could outperform if it brings in more women, raises its investment rate and improves the business climate.

Meanwhile, the TRY remains cheap based on our REER model.

1 See Thoughts from a Renaissance Man: Let’s talk about Sex (and money), 14 November 2019

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Figure 4: Our REER FX model shows that Turkey's currency is about 20% cheap to its long-term average FX rate FX rate Standard Yvonne's Current Date of LT avg IMF 2019E IMF 2020E RenCap 1Y local implied if REER falls deviations avg REER FX rate REER divided by C/A C/A 20YE currency by LT to previous away from 9/19 vs $ low current rate (% GDP) (% GDP) forecast yields avg REER lows historic average estimate Czech Republic 22.8 28.2 43.7 Jan-95 1.24 -0.1 -0.2 1 2.0 China 7.00 8.42 11.6 Apr-95 1.20 1.0 0.9 1 2.2 Thailand 31.0 36.6 53.6 Jan-98 1.18 6.0 5.4 1 1.1 Philippines 50.8 60.1 84.2 Feb-04 1.18 -2.0 -2.3 1 3.7 India 71.3 84.3 104 Nov-96 1.18 -2.0 -2.3 1 5.4 Egypt 15.8 18.1 27.7 Dec-03 1.15 -3.1 -2.8 0 17.5 16 14.0 Qatar 3.67 4.14 5.28 Dec-03 1.13 6.0 4.1 1 3.67 2.7 Indonesia 13,715 15,452 40,331 Jun-98 1.13 -2.9 -2.7 0 4.9 Peru 3.37 3.72 4.22 Jul-07 1.10 -1.9 -2.0 1 2.0 Saudi Arabia 3.75 4.12 5.02 Mar-08 1.10 4.4 1.5 1 3.75 2.0 Russia 63.4 69.1 135 Jan-99 1.09 5.7 3.9 0 67.3 5.3 UAE 3.67 3.98 4.57 Nov-07 1.08 9.0 7.1 1 3.67 2.3 Poland 3.87 4.00 4.83 Nov-97 1.03 -0.9 -1.1 0 1.1 Hungary 305 309 415 Apr-95 1.01 -0.9 -0.6 0 0.1 Korea 1,188 1,188 1,843 Jan-98 1.00 3.2 2.9 0 1.3 Taiwan 30.2 29.6 34.7 Nov-09 0.98 11.4 10.8 0 1.1 Greece 1.11 1.15 1.00 Sep-00 0.96 -3.0 -3.3 0 0.0 Pakistan 154 147 169 Sep-01 0.95 -4.6 -2.6 0 160 13.1 Malaysia 4.11 3.90 5.89 Dec-98 0.95 3.1 1.9 0 2.8 Brazil 4.24 3.91 7.55 Oct-02 0.92 -1.2 -1.0 0 4.4 Chile 784 720 894 Jun-03 0.92 -3.5 -2.9 -1 1.8 Colombia 3,397 3,078 4,249 Mar-03 0.91 -4.2 -4.0 0 4.0 Mexico 18.7 16.8 27.1 Mar-95 0.90 -1.2 -1.6 0 6.9 South Africa 14.8 13.3 19.8 Dec-01 0.90 -3.1 -3.6 0 12.6 15 6.5 Turkey 5.98 4.82 7.15 Sep-18 0.81 -0.6 -0.9 -1 6.3 10.3

Argentina* 60.5 40.7 90.3 Jun-02 0.67 -1.2 0.3 -1 45.0 Note: Govt bonds/bills except: Argentina (implied forward), Qatar, Taiwan, UAE (Interbank rates). *Argentina's inflation data were unreliable for 2007-2015 - we have constructed an REER series using 'shadow' inflation data Source: Renaissance Capital estimates

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Turkey 5 Figure 5: Credit ratings TUR Figure 6: Consensus forecasts Figure 9: Eurobonds (10y or closest) vs US 10y yields Current Date (Prior) Outlook 20E 21E Turkey 2029 $ bond Turkey generic 10y yield ($) Foreign currency Real GDP (%) 2.5 3.0 10 US generic 10y YtM Moody's B1 Jun-19 (Ba3) – CPI (%) 11.1 10.4 9 S&P B+u Aug-18 (BB-) = C/A bal. (% GDP) -1.1 -2.4 8 Fitch BB- Jul-19 (BB) = Fiscal bal (%GDP) -3.6 -3.3 7 Local currency 6 Moody's B1 Jun-19 (Ba3) – FX vs $, YE 6.40 6.58 5 S&P BB-u Aug-18 (BB) = FX vs EUR, YE 7.36 7.83 4 Fitch BB- Jul-19 (BB) = Note: Bloomberg Consensus 3 2 1 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Figure 7: Selected benchmark issues Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Amt. Out. Price Coupon Dur. Yield Z-Sprd. Name (mn cu) Level (%) (%) (bps) Figure 10: Government bond yields (lcl) Sovereign Turkey 3M yield Turkey 2Y yield index Turkey 5Y yield index Turkey 10Y yield index $ 30 TURKEY 7 3/8 02/05/25 3,250 112.80 7.38 4.2 4.5 305.8 ED777753227 TURKEY 6 1/8 10/24/28 2,000 105.74 6.13 6.7 5.3 378.5 AS246189324 TURKEY 7 5/8 04/26/29 3,000 115.77 7.63 6.7 5.4 391.1 AW614805921 TURKEY 5 3/4 05/11/47 3,500 95.57 5.75 13.2 6.1 438.6 AN463658418 Local AH004961115 TURKGB 10.6 02/11/26 22,110 102.98 10.60 4.2 9.9 -101.1 TRT110226T1312 TURKGB 10 1/2 08/11/27 18,789 102.85 10.50 4.9 10.0 -89.9 AO83405049 Corporate 6 $ 3 AKBNK 5 1/8 03/31/25 500 102.23 5.13 4.4 4.6 320.3 EK8261373 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19

GARAN 5 7/8 03/16/23 500 105.47 5.88 2.8 4.0 255.5 AM7986749 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 EXCRTU 6 1/8 05/03/24 500 105.25 6.13 3.7 4.7 331.9 AS4022727 TCZIRA 5 1/8 09/29/23 500 102.07 5.13 3.2 4.5 307.8 AP2864852Figure 11: Currency vs $ and Euro and REER (Dec 07 = 100) KCHOL 5 1/4 03/15/23 750 104.02 5.25 2.6 3.9 231.4 JK4093643 TRY vs $ TRY vs EUR TUPRST 4 1/2 10/18/24 700 101.08 4.50 4.0 4.2 280.9 AP4218578 Turkey REER (RHS) REER lt avg. (RHS) 8.0 40 CCOLAT 4.215 09/19/24 500 103.27 4.22 3.9 3.4 198.2 AP1153984 7.0 Weaker 50 6.0 60 Figure 8: Trade profile 5.0 70 Exports, 2018 ($bn) 168 Imports, 2018 ($bn) 223 4.0 80 3.0 90 Geographic share Geographic share 2.0 100 Euro area 32% EU 27% Stronger US 6% China 10% 1.0 110 China 2% US 5% Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Japan 0% Japan 2% Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Other key countries Other key countries UK 6% Russia 8% Figure 12: CPI vs policy rate UAE 6% Iran 3% Turkey CPI, % YoY 1wk Repo rate (%) Iraq 6% Switzerland 3% 30 O/N Borrowing rate O/N Lending rate Israel 2% Korea 3% Late Liquidity window 25 Iran 2% UK 3% 20 Product Product 15 Other manufactures 41% Other machinery/transport 23% Other machinery/transport 26% Other manufactures 18% 10 Textiles, fabrics and clothing 17% Chemicals 13% 5 Food items 11% Gemstones and non-monetary gold7% Iron and steel 6% Fuels 7% 0 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Source for all tables and charts: Bloomberg, Bruegel, IMF, UNCTAD Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

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Turkey Figure 13: Turkey key economic indicators Ratings (M/S&P/F) B1/B+u/BB- EODB Rank: 33 (43) - Strong Corruption Rank: 78 (81) - Middle RenCap Legal score: 25 (36) - Weak Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E Activity Real GDP (% YoY) 0.8 -4.7 8.5 11.1 4.8 8.5 5.2 6.1 3.2 7.5 2.8 0.3 5.0 Investment (% GDP) 28.9 23.0 27.0 31.3 28.3 29.8 29.0 28.4 28.2 31.0 29.6 25.6 27.0 Unemployment rate year-end (%) 10.0 13.1 11.1 9.1 8.4 9.0 9.9 10.3 10.9 10.9 11.0 13.7 13.2 Nominal GDP (lcl bn) 995 999 1,160 1,394 1,570 1,810 2,044 2,339 2,609 3,111 3,724 4,301 4,982 Nominal GDP ($bn) 765 644 772 832 874 950 934 859 863 853 771 757 795 Population (mn) 71.5 72.6 73.7 74.7 75.6 76.7 77.7 78.7 79.8 80.8 82.0 83.0 84.0 GDP per capita ($) 10,692 8,882 10,476 11,141 11,553 12,395 12,022 10,915 10,817 10,551 9,405 9,137 9,472 Stock of bank credit (lcl, bn) 310 348 486 649 771 1,034 1,225 1,472 1,715 2,066 2,375 2,778 na Lending/GDP (%) 31.1 34.8 41.9 46.5 49.1 57.2 59.9 62.9 65.7 66.4 63.8 65.0 na Gross domestic saving (% of GDP) 24.0 21.4 21.3 22.4 22.8 23.2 24.4 24.8 24.5 25.5 27.1 25.7 25.2 Prices CPI (average % YoY) 10.4 6.3 8.6 6.5 8.9 7.5 8.9 7.7 7.8 11.1 16.3 15.2 10.9 CPI (year-end, % YoY) 10.1 6.5 6.4 10.4 6.2 7.4 8.2 8.8 8.5 11.9 20.3 11.8 9.9 Fiscal balance (% of GDP) Consolidated government balance -2.7 -5.9 -3.4 -0.7 -1.8 -1.5 -1.4 -1.3 -2.4 -2.2 -3.1 -4.6 -4.7 Primary government balance 1.5 -1.5 0.1 1.8 0.7 0.8 0.5 0.6 -1.0 -0.9 -1.6 -2.8 -2.5 Total public debt (% of GDP) 38.2 43.9 40.1 36.5 32.7 31.4 28.8 27.6 28.3 28.2 30.2 30.1 30.5 External indicators Exports ($bn) 107 132 102 114 135 152 152 158 144 143 157 168 172 182 Imports ($bn) 170 202 141 186 241 237 252 242 207 199 234 223 203 223 Trade balance ($bn) -69.9 -38.8 -71.7 -105.9 -84.1 -99.9 -84.6 -63.4 -56.1 -76.8 -55.1 -31.2 -41.2 Trade balance (% of GDP) -9.1 -6.0 -9.3 -12.7 -9.6 -10.5 -9.1 -7.4 -6.5 -9.0 -7.1 -4.1 -5.2 Current account balance ($bn) -39.4 -11.4 -44.6 -74.4 -48.0 -63.6 -43.6 -32.1 -33.1 -47.3 -27.3 1.5 -5.4 Current account balance (% of GDP) -5.2 -1.8 -5.8 -8.9 -5.5 -6.7 -4.7 -3.7 -3.8 -5.6 -3.5 0.2 -0.7 Net FDI ($bn) 17.3 7.0 7.6 13.8 9.6 9.9 6.3 14.2 10.8 8.8 9.3 7.0 7.5 Net FDI (% of GDP) 2.3 1.1 1.0 1.7 1.1 1.0 0.7 1.6 1.3 1.0 1.2 0.9 0.9 C/A balance plus FDI (% of GDP) -2.9 -0.7 -4.8 -7.3 -4.4 -5.7 -4.0 -2.1 -2.6 -4.5 -2.3 1.1 0.2 Exports (% YoY, value) 24 -23 11 18 13 0 4 -9 -1 10 7 2 6 Imports (% YoY, value) 19 -30 32 30 -2 6 -4 -14 -4 18 -5 -9 10 FX reserves (ex gold, US$bn) 70.4 70.9 80.7 78.3 99.9 110.9 106.9 92.9 92.1 84.1 72.9 79.1 80.0 Import cover (months of imports) 4.2 6.0 5.2 3.9 5.1 5.3 5.3 5.4 5.6 4.3 3.9 4.7 4.3 External Debt Gross external debt YE ($bn) 281 269 292 306 342 393 406 401 410 455 445 452 na Gross external debt YE (% of GDP) 37 42 38 37 39 41 43 47 47 53 58 61 na Gross external debt YE (% of exports) 213 263 256 226 225 259 258 278 287 290 265 264 na Short-term external debt YE ($bn) 53 49 77 83 102 133 135 105 101 119 116 122 na Short-term external debt YE (% of GDP) 7 8 10 10 12 14 14 12 12 14 15 16 na Short-term external debt YE (% of exports) 40 48 68 62 67 88 86 73 71 76 69 71 na Short-term external debt to reserves (%) 75 69 96 106 102 120 126 113 110 142 159 154 na Total debt service ($bn) 56 63 59 58 57 64 58 56 76 87 na na na Total debt service (% of GDP) 7 10 8 7 7 7 6 6 9 10 na na na Total debt service (% of exports) 42 62 52 43 37 42 37 39 53 55 na na na Total debt service to reserves (%) 79 89 74 74 57 58 55 60 83 103 na na na Currency and monetary policy Key policy rate (% YE) na na 6.5 5.8 5.5 4.5 8.3 7.5 8.0 8.0 24.0 12.0 10.0 Broad money growth (%YoY) 23.9 13.2 18.8 13.7 13.1 20.1 11.8 17.5 16.1 15.5 18.6 na na Exchange rate (€) annual average 1.91 2.16 1.99 2.33 2.31 2.53 2.91 3.02 3.34 4.12 5.71 6.36 7.31 Exchange rate ($) annual average 1.30 1.55 1.50 1.68 1.80 1.90 2.19 2.72 3.02 3.65 4.83 5.68 6.27 Credit rating history Latest Moody's Ba3 Ba3 Ba2 Ba2 Ba1 Baa3 Baa3 Baa3 Ba1 Ba1 Ba3 B1 na Standard & Poor's BB- BB- BB BB BB BB+ BB+ BB+ BBu BBu B+u B+u na Fitch BB- BB+ BB+ BB+ BBB- BBB- BBB- BBB- BBB- BB+ BB BB- na Note: 2020E exchange rate forecasts from Renaissance Capital Source: IMF, World Bank, JEDH, UNCTAD, Bloomberg 2019E external debt data is refers to latest available

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Turkey

Figure 14: Key data Figure 15: Performance, $ (31 Dec 14 =100) Figure 16: Economic outlook Local Currency TRY GDP/Capita ($) 20E: 9,684 Population, mn 20E: 84.0 S&P / Moody's Rating B+u/B1 MSCI Turkey ($) MSCI EM ($) IMF Forecasts 2018 2019 2020 2021 150 Weight in MSCI EM (%) 0.5% NGDP_RPCHReal GDP (% YoY) 2.8 0.2 3.0 3.0 MSCI Index MXTR 130 PCPIEPCHCPI (year-end, % YoY) 20.3 13.5 12.0 12.0 2020 P/E 6.8 BCA_NGDPDC/A balance (% of GDP) -3.5 -0.6 -0.9 -1.4 2020 EPS Growth 41.2% 110 GGXCNL_NGDPGov't bal. (% of GDP) -3.1 -4.6 -4.7 -5.1 Trailing P/B 1.1 NID_NGDPInvestment (% of GDP) 29.6 25.6 26.0 26.0 Beta to EM 1.0 90 GGXWDG_NGDPGov't debt (% of GDP) 30.2 30.1 30.8 31.7 MSCI Full MktCap, $bn 73.7 Bloomberg consensus MSCI FF MktCap, $bn 30.9 70 Real GDP (% YoY) 2.8 0.2 2.5 3.0 No. of Companies 15 CPI (year-end, % YoY) 20.3 13.5 9.7 na 50 3M ADTV ($mn) 682.9 C/A balance (% of GDP) -3.5 -0.6 -1.1 -2.4 Local Index XUTUM 30 Key policy rate (year-end) 24.00 12.00 9.70 9.50 MktCap ($bn) 206.7 FX No. of Companies 357 TRY vs $ 5.22 5.75 6.40 6.58 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 3M ADTV ($mn) 2,401.9 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 TRY vs EUR 5.90 6.34 7.36 7.83 Note: EPS growth excludes -ve to +ve earnings changes

Figure 17: 3MADTV, $mn Figure 18: Valuations vs EM, 12M Fwd P/E (x) Figure 19: MSCI sector weights

MSCI Turkey ($mn) MSCI Turkey EM 3,000 14 Financials

2,500 5% 12 7% Industrials 2,000 10 7% Cons. Staples 39% 1,500 8% 8 Comms. 1,000 14% 500 6 Energy

0 4 19% Materials

Cons. Disc. Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

Figure 20: Population, '000 Figure 21: Export destinations, total: $167.9bn Figure 22: Currency and Real effective exchange rate TRY vs $ 0-19 20-64 65+ Export, 2018 ($bn) 60,000 20 12% 8 TRY vs EUR 50 Turkey REER (Dec 07 =100), RHS Export, 2018 (% of total), RHS 10% 50,000 15 Weaker 8% 6 40,000 70 10 6% 4 30,000 4% 5 2% 90 20,000 2 10,000 0 0% Stronger UK US Iraq Italy 0 110 Israel 0 Spain Russia France Poland Belgium Romania Germany Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Netherlands

Source for all tables and charts: IMF, Bloomberg, MSCI

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Thoughts from a Renaissance man

Turkey

Figure 23: Index and key stock data (by free float market cap) Market Float 3M US$ performance (%) 12MF Trail 12MF 12MF # of MSCI cap Mcap ADTV P/E P/B RoE DY Analyst Weight Ticker Name Sector ($mn) ($mn) ($mn) 1M 3M 12M (x) (x) (%) (%) recs. (%) MXTR MSCI Turkey 73,711 30,917 682.9 2.5 8.7 -5.4 6.5 1.1 16.0 4.6 0.5% GARAN TI Garanti Financials 8,633 4,566 65.6 12.7 24.4 20.0 5.4 1.0 17.6 na 4 14.8% AKBNK TI Akbank Financials 7,500 3,986 39.8 8.5 16.8 10.0 5.6 0.8 15.8 4.2 5 12.9% BIMAS TI BIM Cons. Staples 5,023 3,447 13.8 4.2 -0.3 -4.5 20.0 7.4 33.6 3.3 17 11.2% TCELL TI Turkcell Comms. 5,344 2,614 20.3 4.7 12.9 -13.2 8.0 1.8 21.0 7.2 13 8.5% KCHOL TI Koc Holding Industrials 8,369 2,488 13.5 -2.9 -1.0 1.4 6.8 1.4 18.3 2.9 7 8.0% TUPRS TI Tupras Energy 4,749 2,345 47.0 -9.8 -15.3 -26.7 6.5 2.2 33.6 13.2 18 7.6% EREGL TI Eregli Materials 5,511 2,145 38.8 5.1 34.9 -0.7 7.4 1.1 13.4 10.6 10 6.9% ISCTR TI Is Bank Financials 5,982 1,934 24.5 20.1 22.0 15.0 4.2 0.6 15.1 4.7 1 6.3% SAHOL TI Sabanci Holding Financials 3,500 1,499 17.4 6.4 17.3 -3.0 na 0.7 na 3.5 4 4.8% ASELS TI Aselsan Industrials 4,694 1,336 85.6 13.0 25.1 -11.7 8.0 2.3 23.0 0.6 3 4.3% THYAO TI Turkish Airlines Industrials 3,327 1,277 281.6 1.0 16.8 -15.9 5.1 0.5 9.9 0.0 11 4.1% AEFES TI Anadolu Efes Cons. Staples 2,527 881 4.1 10.5 23.5 3.4 13.1 1.3 8.0 3.9 2 2.8% FROTO TI Ford Otomotiv Cons. Disc. 4,412 869 4.6 8.9 7.7 15.1 10.8 5.7 46.3 6.8 13 2.8% TAVHL TI TAV Industrials 1,683 813 8.7 -4.4 2.1 -13.7 11.5 1.5 13.1 4.5 9 2.6% ARCLK TI Arcelik As Cons. Disc. 2,459 715 9.7 2.6 16.2 0.3 11.9 1.6 12.4 3.6 4 2.3% ENKAI TI Enka Industrials 5,796 1,739 2.8 8.1 14.6 24.4 10.3 0.9 7.7 4.4 7 na VAKBN TI Vakif Bank Financials 2,844 1,180 29.0 26.6 48.2 26.5 3.5 0.5 13.6 na 2 na YKBNK TI Yapi Kredi Financials 4,287 776 20.9 24.8 23.3 36.4 4.3 0.6 12.1 0.0 1 na HALKB TI Halk Bank Financials 1,552 759 52.1 23.2 35.5 -14.1 3.1 0.3 7.7 1.4 na na PETKM TI Petkim Materials 1,500 735 81.1 12.0 16.0 -19.0 5.9 1.9 21.5 7.8 3 na SISE TI Sise Cam Industrials 2,118 688 53.2 6.7 21.8 -25.8 6.4 0.9 12.7 4.3 6 na ULKER TI Ulker Cons. Staples 1,377 675 3.2 6.3 22.1 10.1 9.7 2.0 20.3 3.0 2 na TKFEN TI Tekfen Industrials 1,209 651 27.7 3.7 9.8 -27.6 6.4 1.3 18.3 6.3 7 na TTKOM TI Turk Telekom Comms. 4,755 633 22.8 11.7 25.8 37.3 8.1 3.2 29.9 9.5 12 na KOZAL TI Koza Altin Materials 2,002 600 18.8 2.8 6.9 34.5 5.6 2.3 28.3 na 4 na TOASO TI TOFAS Cons. Disc. 2,268 556 6.1 2.7 12.6 23.5 8.4 3.4 35.2 6.5 9 na EKGYO TI Emlak Konut Real Estate 1,095 555 38.5 17.9 35.4 0.2 na 0.5 na na 1 na CCOLA TI Coca-Cola Icecek Cons. Staples 1,979 534 3.6 23.3 39.4 23.2 12.8 1.9 13.2 4.6 4 na KRDMD TI Kardemir Materials 556 527 71.5 8.7 24.6 1.2 11.4 0.8 6.0 1.7 6 na AGHOL TI Ag Anadolu Grubu Industrials 802 514 3.3 15.5 23.1 29.8 na 1.0 na na na na SOKM TI Sok Marketler Ti Cons. Staples 1,061 447 1.6 1.0 7.1 -19.6 74.9 24.2 49.1 0.4 10 na PGSUS TI Pegasus Industrials 1,280 442 35.5 -10.0 13.1 121.2 5.6 1.6 24.0 0.0 10 na KRDMA TI Kardemir Kara-A Materials 556 422 0.8 7.5 26.7 17.4 11.3 0.8 6.0 na 6 na MAVI TI Mavi - Class B Cons. Disc. 487 413 2.0 5.5 24.3 29.8 11.4 6.5 34.0 2.4 4 na MPARK TI Mlp Saglik Hizme Healthcare 620 407 0.8 14.3 13.7 18.1 21.8 23.6 42.4 0.4 8 na SODA TI Soda Sanayii Materials 1,069 406 26.6 3.8 11.0 -14.9 na 1.1 na na 2 na DOHOL TI Dogan Holding Industrials 903 378 8.0 12.1 13.0 56.5 na 0.8 na na na na ENJSA TI Enerjisa Enerji Utilities 1,680 336 4.8 16.3 31.9 30.3 7.6 1.6 29.8 8.2 4 na KOZAA TI Koza Anadolu Met Materials 698 333 40.3 1.6 19.5 51.9 4.8 1.6 25.8 na 1 na TSKB TI Turkiye Sinai Financials 652 289 13.2 19.9 46.7 44.6 4.5 0.8 13.9 na na na YGGYO TI Yeni Gimat Gayri Real Estate 344 276 0.1 -0.8 8.1 27.4 na 1.0 na na na na BERA TI Bera Holding As Industrials 256 256 5.9 21.9 35.4 85.1 na 0.9 na na na na TRKCM TI Trakya Cam Industrials 854 253 12.9 17.7 33.7 5.4 5.1 0.8 15.4 4.0 3 na ISDMR TI Iskenderun Demir Materials 3,823 196 1.7 1.0 18.4 3.1 7.7 1.5 8.2 10.4 2 na AYGAZ TI Aygaz As Utilities 673 195 1.0 4.5 17.2 -2.0 6.1 1.7 23.5 12.2 4 na OTKAR TI Otokar Industrials 638 195 2.1 -2.4 7.6 30.3 8.3 6.4 57.0 7.5 3 na LOGO TI Logo Yazilim IT 284 189 1.1 14.4 65.0 90.5 16.6 4.9 22.1 1.2 2 na AKSA TI Aksa Cons. Disc. 446 186 1.5 7.7 30.1 46.2 na 1.8 na na 1 na KRDMB TI Kardemir Kara-B Materials 556 185 0.8 8.0 25.7 16.5 11.2 0.8 6.0 na 6 na HEKTS TI Hektas Materials 401 185 4.1 31.2 58.7 133.3 9.0 6.7 49.7 2.2 na na ALBRK TI Albaraka Turk Financials 391 182 29.5 12.4 51.3 32.3 na 0.5 na na na na ISFIN TI Is Finansal Kira Financials 516 181 51.2 12.0 58.7 -32.9 na 2.5 na na na na YATAS TI Yatas Yatak Ve Y Cons. Disc. 223 176 3.8 19.4 36.9 53.1 na 3.6 30.8 na 1 na SASA TI Sasa Polyester S Materials 1,142 173 14.9 6.2 24.7 15.1 na 2.7 na na na na Source: MSCI, Bloomberg

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