The fact that investors in the stock market have different time horizons can create market mispricing. This reality creates opportunity for investors with a long term perspective to generate alpha thanks to short term concerns. Impending action against Syria provides such an opportunity as investors panic over implications for the next month while ignoring longer-term trends. I will briefly discuss two ways to profit from Syrian-distorted pricing, through crude oil and Turkish equities, but first I will explain my expectations for actions against Syria.
The American people have no appetite for another ground war in the Middle East after the prolonged conflicts in Iraq and Afghanistan. Similarly, Obama largely rode his opposition to the Iraq War to the Oval Office in 2008, making him especially reluctant to commit to a long-term operation. In all likelihood before the end of the week, the President will order cruise missiles against important Syrian military outposts to restore the balance of the war to a stalemate. Many rebel factions are as dangerous as Assad, so it is not in the U.S.'s interest to topple his government. A prolonged stalemate that leaves Syria partially controlled by the government and by rebels, thereby stemming emigration, is the best outcome from a U.S. perspective. It would save face on Obama's redline without committing troops or overly angering the Russians. With this in mind, I see the action in Syria as a blip on the radar that should not affect long term investment theses.
With this in mind, I would first like to tackle the move in crude oil. As you can see crude oil, both WTI and Brent, have soared over concerns about Syrian involvement.
With a global economy that isn't growing very fast (China is slowing, the U.S. is sluggish, and Europe is at the flat line), we cannot support oil prices at current levels for very long. If you look at the charts, Brent had been unable to breach $110 while WTI could not hold $107 because of the lackluster economy. Syria is creating an unsustainable price. I also believe that if Syrian action somehow resulted in supply constraints (unlikely as most OPEC members, including Saudi Arabia, oppose Assad), governments would quickly tap their strategic petroleum reserves to push prices back down. Moreover, the U.S. is less dependent on Middle Eastern oil than it has been in decades thanks to fracking and discoveries in the Midwest. This oil rally is a short term blip that will dissipate over the next month as our action against Syria fades from investors' memories. I believe oil will drop back below previous resistance at $110 Brent and $107 WTI. At current prices, I would close longs, and if the futures move another 5% higher, I would initiate shorts to profit from a return to longer run equilibrium.
Next, many emerging markets have suffered from investor caution with Turkey (TUR) particularly hammered as it neighbors Syria. Turkish markets were also hit earlier this summer from internal protests, though Prime Minister Edrogan has tamped down civil unrest by promising a referendum over proposed construction in Istanbul. I believe the Edrogan government is stable and remain impressed by Turkish growth:
At the same time, inflation has stayed below 10% for a decade, which is an unprecedented accomplishment in this emerging market. Concerns over Syria have sent the Turkish stock market plummeting but do nothing to harm the long term trend of Turkish growth and its eventual emergence as a developed economy and global powerhouse.
Turkey now has a P/E of 10x, meaning it is 40% cheaper than the U.S. stock market even as it grows nearly twice as fast. Yes, Syria may cause near term capital flight from Middle Eastern emerging markets but with the conflict likely to stay mostly within Syria's borders and U.S. involvement likely to be brief, the money will return to high growth countries like Turkey.
If you, like me, are a Turkey bull, now is the perfect time to initiate or add to a Turkey long. I recommend doing so either through the Turkey MSCI ETF or through the ADR of its leading bank, Akbank (OTCPK:AKBTY). Lately, the bank has been trading in lockstep with the broader index, but it provides a leveraged bet on their long term economic growth. The bank has been very well run with minimal loan losses, and Turkey's still relatively high inflation helps a lender earn more. The company trades at about a 30% premium to book value, but it is growing extremely fast with assets up 10% year over year. Even more impressively, net income is up over 30% in the last quarter. The company should earn 3.6 billion lira over the next 12 months, or $1.8 billion, meaning it trades at a 7.8x multiple, a discount to the Turkish stock market. AKBTY is an excellent play for those bullish on Turkey, and the timing has never been better.
Warren Buffett has said to be greedy when others are fearful, and Syria is providing such an opportunity. Short term investors are panicking over the implications of U.S. action, creating market mispricing, which long term investors who are willing to ride some bumps for the next month can profit from. I see American involvement in Syria being minimal, and as such, I see Syria's risk premium declining in the coming weeks. To profit, I would cut longs in oil and prepare to short them while adding to Akbank and Turkey, which maintains one of the best long term growth stories of any emerging market.