iShares Turkey ETF Poised for Success

Jun. 7.11 | About: iShares MSCI (TUR)

Turkey is now a serious global economic contender. It has weathered the financial crisis very well, is recording strong economic growth and has a public sector debt-to-GDP ratio that’s enviably low.

Turkey is increasingly being talked about as one of the next BRICs. The New York Times recently described Turkey as “a fast-rising economic power, with a core of internationally competitive companies turning the youthful nation into an entrepreneurial hub, tapping cash-rich export markets in Russia and the Middle East while attracting billions of investment dollars in return.” Turkey is the world’s 18th largest country by population.

In the past, high inflation and political turmoil kept investors on the sidelines from this “East meets West” market. Today, you’ll find a much different Turkey. Inflation hovers at about 7%. Prime Minister Erdogan’s AK Party has inspired confidence in the Turkish economy. HSBC reckons that Turkey will reach investment grade status following the mid-2011 elections, and has recently declared the country to be a ‘preferred emerging market’.

Even better, with a 2011 P/E of 10.7, Turkish equities remain inexpensive compared to the broader emerging markets universe of 11.6 times earnings.

Turkey grew more than 10% in the first half of 2010, rivaling China, and has the strongest growth in the region. Over the next couple of years, Turkey is expected to have the highest GDP growth right across Europe, Middle East and Africa: 7.3% in 2010 and 4.5% in 2011.

2010 has been a defining year for Turkey, with record tourism numbers and a booming real estate sector. The economy is set to get a boost from tourism revenue, with $22.5 billion in 2010 and predicted growth between 6-7% in 2011.

Turkish real estate has gone from strength to strength in 2010, with the construction sector posting an impressive 22% growth for Q2 2010. Both domestic and international demand for quality accommodation in cities such as Istanbul, as well as along the Mediterranean and Aegean coasts, seems to be insatiable with over 32,000 Britons already owning Turkish property. Easing regulations on foreign nationals purchasing land in Turkey is predicted for 2011, which could further boost the market, opening it up to increased levels of lucrative Mid-East and international property investors.

Turkey will not be immune to European fiscal crisis. And the Instanbul Stock Exchange (ISE) – which ranks as the 6th most profitable in the world – is top-heavy in real estate and construction. So, expect some volatility over the near-term.

Nevertheless, Turkey’s banking system has been praised for sidestepping some of the worst effects of the global recession and was recently upgraded by international credit ratings agency, Moody’s. Fitch Ratings has raised its outlook on Turkey from ‘stable’ to ‘positive’ affirming them as ‘BB plus’ – further boosting investor confidence. Turkey’s growth story remains strong.

CONCLUSION: High growth projections, a young population and a low P/E make Turkey a definite “buy.” Turkey-specific investment opportunities are few and far between. I like the Turkey ETF, iShares MSCI Turkey Index Fund (NYSE:TUR). HSBC is also likely to launch a Turkey ETF on the LSE before the end of 2011 – the HSBC MSCI Turkey ETF [LSE:HTRY] – which will have an attractively low total expense ratio (TER) of just 0.6%, that’s below the iShares equivalent. The ETF has been hit hard recently, making it a good time to buy on a dip.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.