Turkey's Geopolitical Risks and Defense Sector: Navigating Stock Valuations Amid Regional Instability

In the intricate web of global geopolitics, Turkey stands at a crossroads-its strategic location, economic ambitions, and defense sector dynamics intertwined with regional and global uncertainties. As 2025 unfolds, the country's defense industry faces a dual challenge: mitigating geopolitical risks while capitalizing on opportunities for growth. For investors, understanding the interplay between Turkey's defense stock valuations and regional stability is critical to navigating this volatile landscape.

Geopolitical Risks: A Looming Shadow

According to the Türkiye Risk Report 2025, geopolitical instability remains the top risk for Turkey, with 92% of experts rating it as high or very high, according to the SETA Security Radar. Regional tensions, including the protracted conflicts in Syria, the Israel-Palestine crisis, and the spillover effects of the Ukraine war, have amplified Turkey's exposure to external shocks. Compounding these challenges is the return of Donald Trump to the U.S. presidency, which has heightened global instability expectations and introduced uncertainties in Turkey's foreign policy and economic relations, as the SETA Security Radar notes.

The European Bank for Reconstruction and Development (EBRD) has acknowledged Turkey's potential to leverage its strengths in defense and logistics but cautions that political tensions, reliance on short-term external financing, and Western sanctions remain significant risks, in an EBRD report. These factors create a fragile environment for the defense sector, where growth is contingent on both domestic policy coherence and regional de-escalation.

Defense Sector: Growth Amid Constraints

Turkey's defense sector has made strides in indigenization, with domestic production now accounting for 80% of military equipment, according to a Prisme analysis. Projects like the Altay main battle tank and the KAAN fifth-generation fighter jet underscore Ankara's ambition for strategic autonomy. However, these programs face technical delays and supply chain disruptions. For instance, the Altay tank's serial production remains delayed until 2025, while the KAAN jet's operational viability is not expected before 2035, as the SETA Security Radar observes.

Despite these hurdles, the sector is projected to grow at a CAGR of 9.61% from 2025 to 2035, reaching $58.88 billion by 2035, according to a PMC study. This growth is driven by increased defense budgets, such as the 2025 allocation of $47 billion, and a focus on R&D. The SETA Security Radar highlights investments in unmanned systems, air defense, and naval capabilities as key drivers.

Stock Valuations: A Tale of Two Forces

The performance of Turkish defense stocks is shaped by a delicate balance between geopolitical risks and innovation. For example, ASELSAN, Turkey's largest defense electronics firm, reported an 11.3% revenue increase in H1 2025, with a P/E ratio of 61.0 (TTM) as of October 2025, reported by International Defence Analysis. Its order backlog expanded to $16 billion, reflecting strong demand for its systems. Similarly, Baykar, a leader in UAV exports, generated $1.8 billion in 2024 revenue, with 90% derived from international sales, according to the Prisme analysis. Roketsan aims for $1.8 billion in 2025 revenue, emphasizing collaboration with 650 suppliers, as noted in the EBRD report.

However, these valuations are sensitive to regional stability. A study on global defense stocks found that geopolitical risk (GPR) events increase market volatility, while innovation in areas like AI and unmanned systems provides more consistent returns, as highlighted by the EBRD report. In Turkey, the interplay is nuanced: while defense stocks benefit from rising demand during crises, prolonged instability can strain corporate investment and access to foreign technologies, a pattern observed in the International Defence Analysis piece.

Regional Stability and the Geopolitical Risk Index

The Geopolitical Risk Index (GPR) serves as a barometer for Turkey's defense sector. Research indicates that GPR events-such as military buildups or terrorism-related incidents-negatively impact stock performance, according to the PMC study. For instance, the 2019 exclusion from the F-35 program following the S-400 purchase led to sanctions and constrained access to foreign technologies, as discussed in the Prisme analysis. Conversely, periods of relative stability, such as improved EU-Turkey cooperation, could unlock growth opportunities for the sector, a dynamic noted in the EBRD report.

Investment Implications

For investors, the Turkish defense sector presents a paradox: high growth potential amid significant risks. Key considerations include:
1. Diversification: Defense stocks like ASELSAN and Baykar offer exposure to a growing industry but require hedging against currency volatility and geopolitical shocks.
2. Policy Watch: Shifts in Turkey's foreign policy, such as rapprochement with NATO allies or further isolation, will directly impact sectoral valuations.
3. Innovation Focus: Companies prioritizing R&D in indigenous technologies (e.g., Baykar's UAVs, ASELSAN's radar systems) are better positioned to weather external shocks.

Conclusion

Turkey's defense sector is a microcosm of the broader challenges facing emerging markets in a fragmented global order. While geopolitical risks loom large, the sector's resilience-driven by indigenization, export success, and strategic investments-offers compelling opportunities for investors willing to navigate the uncertainties. As the Geopolitical Risk Index continues to fluctuate, the key to unlocking value lies in aligning investments with firms that balance innovation with adaptability to regional dynamics.