By Ivan Y.
After a healthy gain from the beginning of the year up to the middle of May, Turkey's stock market has experienced a vicious correction in the past few weeks because of the protests against Prime Minister Erdogan. The main index in Turkey, the ISE National 100, is down about 4% for the year. Some believe that these protests are similar to the protests that took place in Egypt in 2011. I am not a political analyst, but from an economic point of view this comparison is faulty because Turkey has a growing economy and a relatively good standard of living. Egypt's GDP per capita in 2012 was $6,600, but Turkey's GDP per capita in 2012 was significantly higher at $15,000. That ranks Turkey just below Mexico, but above three of the four BRIC nations (Brazil, India, China).
Here is the full GDP per capita ranking. Looking forward, the IMF estimates that Turkey's GDP per capita will grow to over $20,000 by 2018, while Egypt's GDP per capita is expected to grow to only $8,700 by 2018. Thus, the quality of life for the average citizen of Turkey is much higher than it was for the average citizen of Egypt in 2011, which makes Turkey much less likely to experience an uprising to the same degree of Egypt. Once the dust settles, Turkey should remain an investable country for an internationally diversified portfolio. Here are some factors that argue in favor of investing in Turkey:
- A young population (average age is about 28-29 years). To put this in perspective, the average age in the U.S. and Canada is 37.2 and 41.5, respectively.
- One of the lowest debt to GDP ratios in Europe (about 40%). This is better than Germany.
- One of the lowest budget deficit to GDP ratios in Europe (about 2.3%). Better than the U.K. and France.
- Fitch and Moody's have both upgraded Turkey's credit rating to investment grade. S&P rates Turkey at just below investment grade.
Further, Istanbul is one of the finalists to host the 2020 Summer Olympics. The decision will be made in September this year. According to the odds-makers, Tokyo is the favorite but Istanbul is the second choice.
Besides the political protests, there are also a few other issues to be concerned about when investing in Turkey. These include the potential of the war in Syria spilling over the border into Turkey and an inflation rate that is somewhat high. Through the first five months of this year the average annualized inflation rate as measured by the consumer price index was 6.85%. Since 2005, the inflation rate in Turkey has mostly ranged from about 6% to 12%, so the current inflation is relatively low when compared historically but still higher than what would be ideal. The Turkish central bank has an inflation target of 5%, which they believe they can reach by the end of the year.
Investing in Turkey
While the iShares Turkey ETF (TUR) is the most popular ETF, the cheapest way to play the Turkish stock market is the Turkish Investment Fund (TKF), a closed-end fund managed by Morgan Stanley. It is currently selling at a 11.8% discount to net asset value, which provides a margin of safety that is especially important during these chaotic times in Turkey. The net asset value is $17.99, but the share price for TKF is only $15.87 (Tuesday end of day). The fund has an annual expense of 1.2% which is higher than TUR's annual expense of 0.6%. The top five holdings in TKF (as of March 31) are:
- Garanti Bank (TKGBF.PK) (19%)- It is Turkey's second largest private bank with over 950 branches. It has total assets of about 185 billion Turkish Lira (equivalent to US$99 billion). In its most recent quarter, the bank reported net profit of US$630 million equivalent. (website)
- Anadolu Efes Brewery ve Malt Sanayii (AEBMY.OB) (10%) - It is the holding company of the Efes Beverage Group, which produces, sells, and distributes various beer and malt products. The company has also partnered with Coca-Cola (KO). Having joint control over Coca-Cola Icecek AS, they produce and market products with the Coca-Cola trademark in Turkey, the Middle East, and Central Asia. (website)
- Tupras-Turkiye Petrol Rafineleri (TUPRY.OB) (9%) - You can probably guess by the name that this company refines petroleum, and that is exactly what it does. They produce gasoline, diesel fuel, heating oil, etc. In its most recent quarter, they reported net profit of US$73.2 million equivalent. (website)
- Halkbank (THBIF.PK) (8.6%) - It is a state-owned bank and one of the ten largest banks in Turkey. In its most recent quarter, the bank reported net profit of US$379 million equivalent. (website)
- Sabanci Holding (HOMJF.PK) (8%) - This is a conglomerate that is involved in almost any industry you can think of: financial, auto, energy, telecom, paper, hotels, etc. So you can think of it as the General Electric (GE) of Turkey. (website)
If you believe in the Turkey story, then the market has presented a buying opportunity right now. There is some obvious political risk and the situation in Turkey may get worse before it gets better, but reward usually doesn't come without taking risks.