The Turkish stock market:
Since 2013 the Borsa Istanbul (BIST) offers the whole spectrum of investment media to the public: equities, commodities, ETFs, bonds, derivatives etc. Before that, the different securities were traded at separated markets.
There are more than 300 companies currently traded at the BIST. One of the most relevant total-return indexes is the ISE-30. It includes the 30 most important companies in Turkey.
The underlying economy has developed impressively through the last decade. As the graphic shows, we observed a remarkable 80% growth of GDP during the last ten years. The comparison to the US puts Turkey's economic growth in relation to the world's largest economy. Of course, we must also acknowledge the typical volatility that such emerging countries usually experience.
Before we actually provide information about attractive companies in Turkey, we will discuss the possible risks that are associated with investments in the country. We are convinced, that these risks should be carefully considered before any investment is made.
There are several important political factors, that can influence Turkey's national economy and therefore also hurt its stock market in general.
a) Civil war in Syria
The ongoing civil war in Syria, Turkey's neighbor, has brought the realities of war right to its front door. Many thousands of people fled from the conflict into the Hatay region in the south of Turkey. The risk that Turkey might get actively involved in this conflict is not unreal, even though the political leadership in Ankara is trying to prevent a further escalation.
b) Islamic state
Turkey's borders to Iraq and Syria directly involve the country in the fight against the terrorist group Islamic State (IS or ISIS). The group has recruited many Turkish individuals and announced the possibility of terrorist attacks in the Turkish mainland. Such an attack would clearly result in panic and a massive destruction of value.
Besides this already unfriendly environment, the country also faces large problems on the inside, that could influence the financial markets.
The country's president and his government were several times involved in scandals around bribery and corruption. We think, even if the direct impact on the economy might be of limited size, a more reliable and stable political culture would foster investors' confidence in Turkey's financial markets as a whole.
The ethnic minority in the east of the country is in steady debate with the central government about its independence. The military arm of this movement, the PKK is classified as a terrorist group. Currently, the fight against IS in the region seems to be PKK's main focus and the Kurdish conflict itself remains unsolved. A settlement of this issue would be beneficial for the stability of the whole region and the country's economy.
Altogether, Turkey is in the neighborhood of various violent conflicts. On the other hand, the country is pushing forward its integration towards Europe. This interesting position between Asia and Europe has always been Turkey's strength and weakness at the same time. We therefore think, that investors should be well aware of the situation but not overestimate its severity.
The investment in foreign countries always carries possible currency risks. Even though these risks can be easily hedged, we would like to provide some information on the matter: While investments in USD clearly suffered from the weak TRY, the picture does not look much brighter for Turkish holdings in EUR either.
In this respect, we think the presence of vivid inflation in Turkey should be kept in mind.
With all this information about the potential risk involved in Turkish investments, we will now get down to the companies and see if the market at the Bosphorus has some attractive companies, that are worth further research.
First, we will define the threshold of our filters, that should help us to find interesting companies. This rather mechanical approach is meant to provide a general and widely accepted framework for value investments. A first shortlist will only be filtered along formal guidelines. We are confident, that further individual research can also start from this earlier point.
- Price-to-book ratio: < or = 1.2
- Market Capitalization: > or = 50 million USD
- Price-to-earnings ratio: < or = 12
- Price-to-cash flow ratio: < or = 10
- Debt-to-equity ratio: < or = 0.5
Furthermore, we expect the following formal requirement:
- The company must be traded in the US (have a US Ticker symbol)
If we start to filter the Turkish companies along our formal requirements first, we arrive at the following general list of 30 companies:
After further research it became clear, that many of the companies above are not frequently traded OTC in the United States. The following table provides the fundamental data as described in our filter. The first group of companies had US data available. The second group had data available form the European stock exchanges and a US ticker symbol. The last group had no European listing and no data available for the US version. All companies were researched here. It is indeed possible, that data for the last group might be available through further intensive research.
This formal filter already reduced the number of companies to 16.
If we then apply our numerical selection as described above, the companies that fulfill at least 4 of 5 criteria are:
- Anadolu Efes (OTC: OTCPK:OTCPK:AEBZY). The company produces beer and other beverages and distributes them in Turkey and worldwide. Efes meets 5/5 metrics and is the 11th largest beer producer worldwide.
- Koc Holdings (OTC: OTCPK:OTCPK:KHOLY). This business is a diversified family business and responsible for 12% of Turkey's export. Koc meets 4/5 metrics. Beside automotive production, the holding also produces other consumer goods and is an active player in the tourism and construction sector.
- Koza Altin Isletmeleri (OTC: OTCPK:OTCPK:KOZAY). The company is active in the mining business (e.g. gold mines in western Turkey). It meets 5/5 of our metrics.
- Turk Hava Yollari (OTC: OTCPK:OTCPK:TKHVY). This company, also known as Turkish Airlines is Turkey's largest airline. It meets 4/5 of our criteria. The Turkish state owns 49% of the business.
We think, that these four companies are worth further research for investors who are interested in the Turkish market. It is exciting to acknowledge, that all four companies have strong interests towards export and global trade. Furthermore, all businesses are large in terms of their relative market capitalization.
As mentioned before, this short list should not be understood as an exclusive choice or the 'one and only' solution. However, we think the rather rigid standards have reduced the number of companies in a reasonable way.
One problem that became obvious through our research is the accessibility of the Turkish market via US exchanges. The thin data on many companies is unsatisfying. One solution might be to carefully explore the possibility of investment via European exchanges. The filter provided here should work generally independent of a such different setting.
The conclusion of our research here should be that, there are Turkish companies which fulfill certain rigid criteria about their relative attractiveness as value based investments.
Our list and the approach itself only provide a starting point for further research. We believe, that responsibly conducted analysis must also evaluate the specific country risks we have sketched above. A good way to start would be to relate the individual companies and their business model to each specific risk.
As a final note, we would like to clarify again, that investing in Turkey can imply serious risks, which are not comparable to investments in US markets.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.