‘The best thinking has been done in solitude. The worst has been done in turmoil’ – Thomas A. Edison
Mention of ‘Turkey’ in the summer is typically centred around a summer holiday or some unseasonal longing for a Christmas meal. In the last week or so, however, mentions of ‘Turkey’ have been centred on the country’s political and economic crisis, captured by the plunging Turkish lira.
Turkey has plenty of challenges with a rising budget deficit and a sticky inflation rate but, it has not helped itself, by having a central bank which appears deeply politically influenced. This is a shame because the country sits in a strategically good location and has a youthful and well-educated workforce. So whilst the outlook today looks grim, the country retains an ability to bounce back over time. Shorter-term, however, this is another signal that the geopolitical backdrop today is not straightforward. Worsening US-Turkish relations over recent weeks – culminating in a doubling of steel/aluminium tariffs by the United States – reflects the world’s biggest economy getting their elbows out on multiple matters pertaining to financial markets, supplemented by the impact of a higher dollar and a differentiated higher interest rate cycle by the Federal Reserve. If you are looking for reasons to be cautious then look no further. The better news is that the post midterm election period probably does not offer so much…flexibility for US external policy and rhetoric. And with this the scope for a lower dollar and more general calm and balance. In my opinion time for President Trump to strike a few deals.
Talking about dealmaking, I have no idea whether Elon Musk has struck a funding deal which offers the potential scope to take Tesla shares private. However I do observe that if this deal ever goes through then it would be the biggest leveraged buyout (LBO) ever, besting two big deals struck in the 2006-7 period. That period – just over a decade ago – proved in hindsight to be a high point before the global financial crisis impacted. Markets of course tend to follow the Mark Twain dictum of never precisely repeating but rhyming, and talk of large LBOs worry me more than excite me. Suffice to say higher US interest rates, let alone heightened concern about the emerging markets, tends not be good for such deals. Tesla’s continued negative free cash flow yield is striking too in this regard.
Mix all the above and more together and you can see why I titled last week’s musings as I did. Both the above big issues as well as the general moves in many financial markets have been heightened by the lowered liquidity seen in August. This provides active investment management opportunities. More on this – in the context of the Global Dynamic Opportunities Fund – later on during the month.