Investing in Turkey: Break From the Crowd

Jan.17.11 | About: iShares MSCI (TUR)

By Carl Delfeld

Need another reason why you shouldn’t follow the investment masses?

Look no further than Turkey’s red-hot economy. Having posted a double-digit growth rate over the first half of 2010, fickle investors decided that a mere 5% expansion during the fourth quarter wasn’t enough for them.

Result? The iShares MSCI Turkey Index (NYSE: TUR), which tracks the Turkish stock market, has dropped from a high of $79 in early November to $67 today, as investors got spooked.

But the underlying facts tell a different story – and now might be a great time to “buy on the dip”…

The Power Behind Turkey’s Population and Fiscal U-Turn

Like many other emerging markets, Turkey is under the radar for many investors, but the country boasts a couple of compelling statistics…

  • Young Population: With a population of 72 million (the 18th largest in the world), one-quarter of its residents are under 15 years of age, while just 6% are over 65. Compare that to Japan, where 27% of the population is over 65, and you’ll see the huge growth potential there.
  • Fiscal Prowess: Prime Minister Recep Tayyip Erdogan has successfully combined social conservatism and cautious fiscal policy. In fact, Turkey’s fiscal situation has seen a massive improvement.

For example…

  • A decade ago, the country’s budget deficit represented 16% of GDP. But last year, the country slashed that number to 3.6%.
  • The country’s inflation rate sat at a whopping 72% a decade ago, but is down to 8% today. Nevertheless, keeping this number low still poses a serious challenge for Turkey.

So should you take a look at a market that seems exotic and unknown to many?

A Regional Heavyweight

Much is written about Turkey’s fluctuating candidacy for EU membership, but the irony is that it’s actually much closer to fulfilling the criteria for adopting the euro than many of the troubled economies already in the 17-nation eurozone.

Additionally, the country benefits from its geographic location, which allows it to foster close trade ties with Western Europe. Commercially, it also boasts a strong relationship with the United States, as well as with Israel, Russia, Saudi Arabia, Iran and Syria. It seems clear that Turkey hopes to become the dominant political player in the region.

Turkey Pushes Through the Headwinds

So in light of these positives, why has the iShares MSCI Turkey Index seen a sharp pullback?

  • Monetary Policy: In addition to the GDP growth pullback during the fourth quarter, Turkey’s central bank has taken the unconventional step of lowering interest rates, even amid inflationary pressures. However, this was in order to stem the rise of the Turkish lira and curtail capital inflows. In addition, the record-low rates have had the doubly positive effect of helping spur Turkey’s economic growth, as well as lowering the cost of government borrowing.
  • European Bank Turbulence: The banking sector woes across Europe have undoubtedly had an impact on Turkey, which has a strong presence in financials.
  • Election Year: With parliamentary elections taking place in six months, some are concerned that this will mean a bump in fiscal stimulus – an uncertain situation that the market usually dislikes. However, the government has vowed to keep spending tight in the run up to Election Day.

So despite a few obstacles, Turkey’s powerful economic story still seems intact. What’s more, its market is solidly undervalued and falls at the low end of emerging nations. It currently trades at 13 times earnings, while by comparison, India sits at 23 times and Indonesia is at 20 times.

So if you’re looking to add a powerful, under-the-radar, solidly valued country to your emerging market portfolio this year, Turkey is worthy of your consideration.

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