Strategic Investment in Turkey's Economic Recovery: Navigating Local Currency Bonds and Export-Driven Equities

Turkey's economic recovery in 2025 is unfolding against a backdrop of cautious optimism, marked by a disinflationary trend, resilient export sectors, and a recalibrated monetary policy. For investors, the country presents a complex but compelling opportunity, particularly in local currency bonds and equities tied to its export-driven industries. This article dissects the risks and rewards of these investment avenues, offering actionable insights for navigating Turkey's evolving economic landscape.

The Inflationary Dilemma and Local Currency Bonds

As of April 2025, Turkey's annual CPI inflation stands at 37.9%, a decline from its peak in May 2024 but still elevated by global standards. The Central Bank of the Republic of Turkey (CBRT) has responded with a 46% policy rate, one of the highest in the world, to stabilize the lira and curb inflation. The 10-year government bond yield hit 27.67% in March 2025, reflecting heightened political and economic volatility, particularly after the detention of Istanbul's mayor, Ekrem İmamoğlu.

While the yield environment is attractive for yield-seeking investors, it comes with significant risks. Political instability, institutional fragility, and the potential for policy reversals under President Recep Tayyip Erdoğan remain critical concerns. However, the CBRT's recent tightening measures and fiscal restraint have begun to restore some investor confidence. Analysts project a gradual decline in yields to 26.17% by the end of Q3 2025, assuming continued adherence to orthodox monetary policies.

For investors with a high-risk tolerance, Turkish local currency bonds offer a compelling trade-off: high yields to compensate for currency depreciation risks and policy uncertainty. The key is to time entry carefully, capitalizing on dips in yields during periods of political or economic calm. Diversification across short-term bonds and hedging against lira volatility can further mitigate risks.

Export-Driven Equities: The Rise of the Defense and Aerospace Sector

Turkey's export growth in 2025 is being driven by its defense and aerospace industry, which is projected to surpass $8 billion in exports—nearly triple the $2.28 billion recorded in 2020. This sector, now a cornerstone of the economy, has achieved a domestic production share of over 80% through aggressive localization efforts. Companies like Turkish Aerospace Industries (TAI) and Baykar are leading the charge, with products such as the T-625 Gökbey helicopter and the Kızılelma unmanned fighter jet gaining international acclaim.

The sector's success is underpinned by strategic investments in R&D, a robust supply chain of over 3,500 firms, and a skilled workforce of 100,000. These equities are particularly attractive for long-term investors, as the global demand for defense technology continues to rise amid geopolitical tensions. Additionally, the sector's diversification into emerging markets—such as Africa, the Middle East, and Southeast Asia—reduces exposure to European market fluctuations.

For equity investors, the focus should be on companies with strong order books, export partnerships, and a track record of innovation. TAI, for instance, has secured contracts with 100+ countries, while Baykar's drone technology is in high demand in conflict zones. However, valuations in the sector are elevated due to strong growth expectations, requiring careful due diligence to avoid overpaying for momentum.

Macroeconomic Tailwinds and Trade Balance Dynamics

Turkey's current account deficit, while expected to widen slightly in 2025, remains below long-term averages. The trade balance has benefited from strong exports, particularly in non-energy sectors, despite global demand softness. The CBRT's de-dollarization efforts have also bolstered the lira's role in the domestic financial system, with lira deposits rising to 58% of total deposits.

Investors should monitor the interplay between the CBRT's monetary policy and global commodity prices, which remain a key risk to Turkey's trade balance. A tighter policy stance and continued export momentum could further stabilize the currency, reducing the cost of foreign debt and improving corporate profitability.

Actionable Investment Strategy

1. Local Currency Bonds: For high-yield seekers, consider allocating a small portion of a diversified portfolio to Turkish government bonds, particularly as yields approach projected declines. Use options or forwards to hedge against lira depreciation.
2. Export-Driven Equities: Overweight defense and aerospace stocks with strong balance sheets and export exposure. Prioritize firms with recurring revenue streams and international partnerships.
3. Diversification and Risk Management: Balance high-risk positions with shorter-duration bonds and equities in sectors less sensitive to political volatility, such as manufacturing and tourism.

Conclusion

Turkey's economic recovery is a story of resilience and reinvention. While challenges persist—ranging from inflationary pressures to political uncertainties—the country's strategic investments in defense and aerospace, coupled with a recalibrated monetary policy, present unique opportunities. For investors willing to navigate the complexities, Turkey offers a blend of high yields and growth potential, provided they approach with caution and a long-term horizon.