I recently took a family vacation in Turkey and it gave rise to some thoughts about Turkey as an emerging market investment. One may question whether Turkey is truly emerging, and Istanbul certainly has the look and feel of a vibrant European capital. I took several walks of five to ten kilometers, and even a bit off the beaten track there are cranes and modern buildings and nothing that looks quite like a slum. People generally seemed organized and energetic, and interested in producing and consuming. I set a lot of store by the brisk-walking, good-posture, good-appetite, good-nature indicator.
My most interesting tourist experience was at the Topkapi Palace Museum, specifically in the rooms of religious relics. Set under protective glass were such items as the swords of the Prophet Mohammad (PBUH) and other major figures such as Ali and Hosain, and also the sword of David and the staff of Moses, who are regarded as prophets in Islam. As I passed the staff of Moses I chuckled and asked my wife (who is Muslim) how likely she thought it was that the stick behind the glass was actually the staff of Moses. Wasn't it actually just a prop for the narrative? I mentioned such Western relics as the Shroud of Turin and the Donation of Constantine (bequeathing all Europe to the Roman Church), which was shown by Lorenzo Valla to be written in the Latin used by 8th Century monks. Why might one doubt the authenticity of Moses' staff? First off, did anybody even think of preserving articles for posterity in those days? What hands might it have passed through over more than three thousand years? What changes of regime? Who might have (like those 8th Century monks) thought it worthwhile to invent an artifact which SHOULD, after all, have been preserved and which gave tangible immediacy to the story? Those schooled in the Judeo/Christian scriptures will note that it was the very instrument with which Moses struck the rock which then flowed with water.
In sum I thought the probability we were actually seeing the staff of Moses was well under 10%. I gave the sword of David (circa 1000 BCE) a generous 15-20% and the artifacts of the Prophet (PBUH) something like 50%. One can imagine them being preserved, or not. I had the most faith, actually, in swords said to have been carried by his army of followers. Archaeologists do come up with and validate articles like that.
So what do Moses' staff and the Topkapi relic room have to do with emerging markets? Well, everything. Emerging markets investing is always grounded in a narrative, of which individual companies and economic trends are props. The narrative tends to invent the facts, which then support the narrative. However good the story, it must be submitted to critical interrogation.
What do we really look for in an emerging market?
(1) Stable currency supported by a stable government.
(2) Friendliness to capital, rule of law, and no extreme hostility to the United States.
(3) Improving economic conditions and especially improvement in the conditions of the poor and development of a middle class.
(5) Low correlation to U.S. markets.
(6) Suitable vehicles for investment.
Did Turkey meet these criteria? Let's start with the basics of the Turkey narrative. Turkey lies on a geographic crossroads, giving it tremendous trade advantages. Turkey has a young population and wonderful demographics. Turkey also has the great good fortune to control its own currency, having lucked out by being denied membership in the EEC (despite better economic statistics than several members). Of course having one's own currency can be a two-edged sword as international capital flows have played and may continue to play a major role in the Turkish economy. Istanbul has a brilliant and glistening skyline of the sort by which emerging economies announce their arrival. Its centerpiece is the Sapphire skyscraper, a symbol of modern Turkey from which you can see all twenty miles of the Bosporus. Is it to be believed?
The caveats about Turkey begin with fears raised by the recent "unrest." Many SA articles on Turkey draw comments on the current demonstrations or fears about Islamic fundamentalism. I believe both concerns are misplaced. The "unrest" is to all reasoned judgment a tempest in a teapot about a small park in the main commercial district led by yuppie secularists who are about as far from a revolutionary class as it gets. The policemen with shields who stood at the entrance to the park seemed in good humor.
The protests were really about a government which is Islamic and becoming a shade more so, but which came to power a decade ago in a free election. Turkey is neither Egypt nor Iran, the Muslim country which most resembles it in size, technological capability, and aspiration to regional leadership. The Iranian revolution was driven by a drastic cultural divide between a Westernized disco/go-go upper class and a wretched religious underclass of "chadori," who felt looked down upon as poor, oddly dressed, and, well, stupid. Under Khomeini's leadership the "chadori" turned Iranian culture upside down with a vengeance. There is no equivalent divide in Turkey. The policy of Ataturk, the founder of modern Turkey, was to modernize and Westernize, but without marginalizing religious traditionalists. His reforms stuck. Turkey also happens to have been one of America's stand-up allies (a fact that unfortunately flies under the radar). I learned this firsthand while serving with Turkish soldiers in Korea in the 1960s.
The more substantial caveat about Turkey has to do with the correlation with other global markets during the crisis of 2009 and its aftermath. Over extended periods of time the Turkish and American markets have been much less closely correlated, but an overlay of the Turkish and U.S. markets over the past five years suggests that despite having its own currency (or perhaps because of it) Turkey participated more than fully in the seize-up of global liquidity and the Fed easing that followed. Thus a shadow of doubt about the Sapphire skyscraper and its neighbors: were they the product of organic growth or were they produced by excessive global liquidity and thus subject to stress from its unwinding? The recent slide in the TL and the Turkish stock market would seem to argue for the latter.
The final caveat is that the easy vehicles for investing in Turkey leave much to be desired. Both the iShare MSCI Turkey (NYSEARCA:TUR) and the Turkey Investment Fund (NYSE:TKF) are topheavy with financials. As for ADRs the only one available is Turkcell, which is ubiquitous in the country. But ubiquity may imply market saturation, and earnings growth has been stagnant for the past four years.
While I would not use the two exchange-traded funds as investment vehicles, I did find them useful as a source for companies worth further investigation. The two which grabbed my attention were Anadolu Efes Birocilik (OTCPK:AEBZY), a beverage company producing both soft drinks and beer (the 10th largest holding of TUR at 3.5% and the 2d largest of TKF at 9%), and Bim Birlesik Magazala (OTC:BMBRF), a grocery/convenience chain (the 3d largest holding of TUR at 6%). It turned out that I had already put both of them to the Peter Lynch test. Efes beer: I tried a couple, and commend them to future travelers. A Bim store satisfied a sudden family craving for American-style packaged ice cream (known to the clerk only as dondurmo, after the very different Turkish product). The sketchy financials I could readily dig up showed robust and consistent growth, especially in the case of Bim, which plowed ahead at more than 20% per year straight through the financial crisis.
I made it a point to eat in restaurants frequented by locals, including a government-sponsored restaurant snuggled against the old wall near the Topkapi Gate (not to be confused with the Palace). It did not serve alcohol but was inexpensive and had wonderful food, happy people, and no problems with Western dress. The customers were mainly families with children - lots of children. Strolling around Turkish neighborhoods reminded me of the America of my childhood in the 1950s, when ordinary people were just waking up to the pleasures of consumption. Grocery chains were among the great growth stories when I first started glancing at the stock page around 1955. One of my neighbors had made a bundle in Dixie Home Stores, a three-store outfit which became a supermarket chain called Winn-Dixie.
It may seem crazy to buy a beer producer in an Islamic society, but there are factors that mitigate the apparent risk. Tourism in Turkey accounts for about 10% of the economy and 7% of employment. Any regime would think long and hard before imperiling such an important contributor to jobs and the current account. There are worries about the new restrictions on advertising and permissible hours for alcohol sale, but they closely resemble the rules in the Bible Belt South where liquor stores may only identify themselves by dots painted on the exterior wall. Or so it was in the recent past. I remember clearly the local (female) school teacher who used to ask my father to make beverage runs for her. How far we have come, I guess. The recently implemented restrictions on Turkish package stores might actually work to the advantage of Efes, which is already well-known and available everywhere, as it is likely to slow the growth of a newcomer like Diageo, which is trying to establish its brands.
Finally, for those who feel that a bank should be part of an emerging market portfolio, I note that Turkiye Garanti (OTCPK:TKGBF) is the number one holding of both country funds. The ten year numbers show steady growth in assets and earnings through the 2009 global crisis, perhaps suggesting a business mix not driven purely by global liquidity. The fact that Garanti is the largest holding but only the second largest bank in Turkey (behind Akbank) suggests that its weighting reflects a positive opinion by the fund managers. Just how much faith to place in their opinion is up to the individual. Do your own due diligence.
Turkey is an investable country. It is hard to fake what people look like in the neighborhoods or when they go out to eat. Turkey is not dependent on exporting natural resources (Brazil, Russia), manufactured goods ((China)), or outsourced services (India). It runs on its own generator. For this reason I prefer Turkey to the BRICs. The demographics are exceptional, per capita income is growing, and the government and culture are friendly to capital. The risk from radical Islam is virtually nil. The opportunity is growth in the consumer sector.