A Look at Emerging Markets: Eye on Turkey

In my duration at the University of California Los Angeles, I took various classes regarding the political and economic makeup of various emerging markets. My main area of focus is specifically Eastern European, Russian, and Near East region. With the rapid expansion of larger emerging economies in the “BRIC” zone, it’s inevitable to see some overspill in the regions I have studied, so I will attempt to bring you various plays over time.

The countries/regions I will focus on in my reports will primarily consist of (though not limited to) the following: Russia, Eastern Europe, Near East and North Africa, Turkey, Israel, Emirates/Dubai, and Armenia/South Caucasus. Today, in light of the recent elections, we focus our attention on Turkey.

Turkey’s recent election has sent a global message stating that they are leaning toward democracy and not an Islamic regime. To the naked eye, this must be mouth watering to investors. They probably look at Turkey as the next “BRIC” or “Baltic Tiger” but if they do not know much about the culture or history of the region they might be setting themselves up for losses. I’d be very skeptical of sustainable economy growth and I will tell you why.

Turkey’s last century has been plagued with events such as the Armenian genocide and a terrible humanitarian track record including the assassination of various journalists, a near collapsed economy, a military takeover of political positions, and, most concerning, the struggle they are facing in getting into the European boys club aka the Euro Zone. Furthermore, the border they share with Iraq is increasingly coming under attack and there have been several suicide bombings in the recent years, which question how securely business can truly be conducted. Additionally, the Kurdish PPK has their headquarters in the southwest region and are determined to create their own independent nation. Oh, and lets not forget another issue relating to their neighboring country of Armenia. They have closed borders with Armenia as a gesture to show support to their Turkic Azeri brothers who have been in a conflict over the homogeneous Armenian enclave of Nagorno Karabagh. One of the requirements for entry into the EU is to have open trade and borders with all neighboring countries. Essentially, there’s a lot the sick man of Europe needs to do before it becomes healthy enough to house a long term and stable marketplace.

There’s another regional superpower that wouldn’t really enjoy the idea of having a strong Turkey in their backyard …and that’s Russia.

With that said, there are always opportunities to trade the volatility that might occur due to the slower moving political events that really set a precedence on the marketplace.

Here’s some proof (talk about volatility!)

Turkish Investment Fund Inc (TKF) is a Turkish fund that has had a nice 20% run-up this year, but what’s even more interesting is the fact that they have an annual dividend payout of $3.3, which equates to about a 16% payout based on the current price it’s trading at. Talk about a way to lure in clients. So there is a high level of risk involved with this play when you sell short if you hold through the Ex Date, but that’s all the way out in December.

Right now there should be some positive press that might pop this even higher, but without any serious change in Turkey it’s almost certain there will be bad enough coverage to bring this back down – of course, assuming the reporter doesn’t get killed before the article hits the press. Buy on the wave up, sell short on the wave down? I'd rather just stick to shorting this thing back down to the 14 dollar range it should be trading at, but that comes with a lot of risk.

If you aren’t too familiar with the current news, Bloomberg endorsed Turkey stating that their markets are trading cheap compared to the valuation of various emerging markets in the region (mainly eastern European countries which is a very different makeup than Turkey). I would strongly advise against taking just a pure financial calculation when looking at the relative strength of the Turkish economy. The country has a lot of internal problems that will steer away investors willing to pay higher premiums for equity in Turkish companies.

Disclosure: none

Comments

[Yaser Anwar]

You have failed to touch on why the ETF is so volatile and an issue without which analysis is incomplete- the currency. The ETF's volatility has largely due to the volatility in the Turkish Lira. That said, I'm pro-Turkey, especially their food sector. Companies are profitable, de-levering and trading at lower multiples vs. European counterparts. Also, recently EU removed taxes on exports from Turkey to the union, which should further bolster the food exports.

WMT is looking to enter Turkey too + one of Templeton's Emerging Market funds took a 10% stake in KOC Holding's food division. Plus, another issue you didn't mention, the country's aim to get into EU, which has attracted substantial FDI, and the AKP will try to further satisfy the requirements.

Long Turkey for me, but I prefer pure plays. Y