By Philip Voutsakis
On March 25, 1821, Greek freedom fighters rose in rebellion against their Turkish oppressors. After a successful revolution, the Greek people gained their independence after 400 years of Ottoman Turkish occupation. Of course, this was not the first nor the last time that Greeks and Turks came head to head in armed conflict. From the 14th century until the most recent Turkish invasion and occupation of Cyprus in 1974, the two countries have battled over and over again. Now that open armed conflicts have subsided, Greeks and Turks have found a new area of conflict to focus on; being the country of primary investment importance in Southeastern Europe.
Of course, one might consider this an easy call since we read of Greece’s financial woes every other day. Greece’s problems are deep-rooted and these issues have directly spelled out as gains for Turkey. This trend will likely continue, despite Athens’ promises to shore up their financial situation since these problems are much more fundamental than what can be solved by sound governmental financial policies.
Since the end of WWII, both countries have sought stronger connections with Western Europe. However, unstable governments prevented this for many years. Greece finally prevailed in this goal in 1981 by joining the precursor to the European Union (Turkey is still negotiating its entrance.) Greece was initially barred from entrance into the Eurozone due to its failure to conform to European Monetary Union convergence criteria (the country held deficit was 11.5% of GDP while the maximum allowed was 3%, the average inflation was 19.8 % while the maximum permitted was 3.2 %.) Eventually, after strong attempts to come within the convergence criteria the European Union allowed Greece to enter the Eurozone (partially by turning a blind eye to some of their own requirements), a move celebrated by many in Greece.
This move, however, may not have resulted in the way that they expected. Though annual Greek GDP growth has consistently stayed between the bounds of 3 – 5%, in GDP terms, Turkey has continuously outperformed Greece for the past ten years (except for 2001) since Greece dropped its previous currency, the drachma.
A major factor in this is the loss of Greece’s competitive advantage it used to enjoy from having a low valued currency. Turkey’s continual use of the low valued lira has allowed Turkey to capitalize on this, much like China has benefited from a low relatively valued Yuan.
Agriculture & Exports
Greece and Turkey both rely heavily on agricultural exports, with olives, cotton, and tobacco being main crops. Both countries also harvest dairy goods, fruit, and fish. Many of these good are exported throughout Europe and the world. Both counties are also heavily involved in the textiles and mining industries as well, also major exports.
Greece’s relative price increases since joining the Eurozone have caused their real growth in goods exports to slow down to 5.3% in the past 10 years, from 12.6% seen in the 6 years before converting to the Euro. This goes against the initial arguments by Greek politicians that a common currency would see an increase in exports to Europe that would offset losses caused by higher exchange rates globally. Turkey on the other hand saw a real growth in exports of goods of 12.8%, only a slight decline from 14.3% seen in the aforementioned 6 year period. The recent flow of oil in Turkey has also given the country an edge. The 1 million barrels per day which flow through the Baku-Tiblisi-Ceyhan pipeline, started in 2006, have been a major boost to Turkey’s economy. In addition Turkey’s manufacturing industry, which includes steel, electronics, and auto production has seen a growth unparalleled in Greece. The lack of an important industrial presence has been something that Greece always suffered from.
One thing to consider, however, is that Greece has seen falling unemployment rates from 2003 to 2009, averaging 9.26% over that span of years. Its current rate is 10.3%, which is just slightly above the EU average. Turkey, on the other hand, averaged 10.23% for that same six year period and currently has an unemployment rate of 14.5%.
One of the biggest effects on both countries has been the revenue gained from tourism. Both countries have always been hotspot destinations for Western European travelers looking for a few rays of sun. Greece attributes about 20% of its GDP tourism, and Turkey about 10%. Despite initial stagnation in tourism since conversion to the euro, Greece saw a spike in the industry after the 2004 Athens Olympic Games (which were financed by a large amount of public debt.) However, there has been a downward trend in growth and this year’s arrivals from the US are expected to drop 30% along with a 6% drop in arrivals from the UK and Germany. The head of research at Greece’s Institute of Tourism Research and Forecast specifies that
What we do expect is a decline in tourism receipts, not arrivals. Tourists may decide to stay for a week rather than two. If they spent, say, 100 Euros a day last year, they may spend 90 Euros this time.
However, many tourists have shown less-optimistic sentiment. Since Greece’s use of the Euro, Turkey has seen dramatic rises in tourism. This year alone they are expecting an 18.5% increase over last year. Many European tourists are looking for a cheaper alternative to the high costs of Greek vacations, Turkey being the closest substitute both in proximity and experience.
There is also not much in the way of government support for tourism in Greece. Turkey, on the other hand the Turkish Culture and Tourism office’s “Turkey Welcomes You” advertisement campaign can be seen on televisions and billboards across Europe and even in the United States. All this has set Turkey to expect record breaking numbers for tourism in 2010.
The one area of financial promise for Greece is its shipping industry, which is unmatched in Turkey. While the recession’s effect on the industry has only led to even more of the nation’s current troubles, a turnaround in the global economic climate can be a huge positive for the country. A pop in the shipping industry was apparent after the last recession in 2001 and could be a strong play for those more optimistic about global recovery. One way to invest in Greece’s shipping industry is the Claymore/Delta Global Shipping Index ETF (SEA). The fund uses a passive investment approach to keep costs low. It does this by replicating the holdings of the Delta Global Shipping Index. 20% of its assets are in Greek shipping companies, the biggest single geographic region in the fund.
Some of the bigger investments are in Navios Maritime Partners (NMM), Tsakos Energy Navigation (TNP), Diana Shipping (DSX), DryShips (DRYS), and Excel Maritime Carriers (EXM). To point out the potential of these companies to take off after a recession, consider EXM. It rocketed from around a buck a share in 2003 to a high of around $40 in fall 2004. After giving much of these gains back in the following two years, it peaked again at around $75 in fall 2007. It is currently trading at $6.10 with a 52 week range of $4.46 to $11.70. Also consider DryShips ($6.01 a share, 52 week range of 4.35% – 11.48%) which saw a not-so-modest 580% return from January to October 2007. It is expecting earnings of $0.83 in 2010 and $1.17 in 2011. These examples serve to show that shipping could possibly be another skyrocket in the recovery of our current recession.
However, we must keep in mind that shipping accounts for roughly 4.5% of GDP and 4% of the workforce, and a rebound for Greek shipping companies alone will likely not be enough to turn the country’s economic state around.
The wearing-away of the purchasing power of Western Europeans and Americans since Greece’s adoption of the Euro has had dramatic effects in the Greek economy. Turkey has capitalized on areas of Greece's economy that have weakened, and has also been able to expand on its base of numerous industries.
Anyone looking for exposure to the Southeastern European market should look into some of the Turkish funds such as the Turkish Investment Fund (TKF), which is a closed end fund, and the iShares MSCI Turkey Investable Market Index (TUR) which is an ETF. TUR has about 50% of its assets invested in financials. Industrials, telecom and consumer staples make up about another third of the investment. The management fee is 65 basis points, and since the fund's inception in April of 2008, the ETF has returned 6.91%. TKF as mentioned, is a closed end fund, so the price of the fund is subject to trading at a premium or discount to the fund's NAV, as is the nature of closed end funds. Investors that are not comfortable with this possibility will likely be better suited to use TUR. Just as TUR, TKF is also heavily weighted in financials. Along with these two funds, investors have the option of investing in the SPDR S&P Emerging Europe ETF (GUR). Turkey is the second biggest holding at 16.36%, after Russia (59.94%). The fund has 40.34% of its assets in energy, which makes sense for the two countries straddling the oil-rich Caucus Mountains. The fund also has 24.05% of its assets in financials, with other major investments in materials and telecom. Since GUR’s inception in March 2007, the fund has lost 8.10%.
Currently, there are no ETFs that are dedicated to specific exposure to Greece. One option however, is [[EZU]], the iShares MSCI EMU Index Fund. It has 1.21% of its assets invested in Greece. The biggest three holdings in this category are National Bank of Greece, Coca-Cola Hellenic Bottling Company, and OTE (the Hellenic Telecommunications Organization). However, the fund does not have any holdings in any of the major Greek shipping companies. As we see a hopeful turnaround in Greece, expect at least one fund to appear and come out betting on a strong recovery in Greek markets. Of course, nothing is for certain in the markets – but one thing that will not change, Greeks and Turks will always be competing.
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Disclosure: No positions