Turkey’s star is still rising for ETF investors

WITH a near-record 18 IMF bailouts, Turkey might not seem like a smart investment to the untrained eye. But in just a decade the country has gone from a basket-case to a fully-fledged bull market. At this rate the country is tipped to grow faster than China in the next decade. News like this has generated huge interest from exchange traded fund (ETF) investors and providers alike. But could this be too much too soon? Emerging market guru Mark Mobius thinks so. And he got himself into a lot of trouble with Turkey’s Capital Markets Board last week by saying so. He reckons that there will be a 15 to 20 per cent correction on the Istanbul Stock Exchange by the end of the year. Could he be right? Is the relentless boom really here to stay?

Turkey certainly seems to have learnt its economic lesson. In 2001 Kemal Dervis, the World Bank economist, was set loose on Turkey’s economy. He rescued the banks and brought in new monetary and fiscal policies. Thankfully his successors have broadly followed suit. Analysts think that Turkey’s ambition for EU membership is keeping the their politicians on the fiscal straight and narrow.

Dervis’s economic clean-up seems to have paid off. Even though the 2009 crisis hit Turkey hard, the economy has come back fighting – unlike its struggling Club-Med sisters: Spain, Portugal and Greece. During the global crisis, these countries’ credit-default swap spreads rose sharply, but Turkey’s barely moved. In fact, Turkey boasted a spread below that of Italy this summer. The fact that Turkey has recently been upgraded to a BB+ rating from BBB recognises this achievement.

The financial sector is also in better shape thanks to Dervis’s reforms. In some ways, they have meant Turkey’s banks are in better shape than many in western Europe. The capital ratio has lifted to 19 per cent and the loan-leverage is below that of the US and EU. This is great news for investors tracking the MSCI Turkey Index because 59.78 per cent of the allocation is in the financial sector. Turkey’s demographics are also enviable. The average age is 29 (the UK’s is 40) and it is estimated that the population will grow to 100m by 2050.

But is this too good to be true? Emerging market specialist Esther Law of Societe Generale warns that a lot depends on how quantitative easing (QE) pans out over the coming weeks: “If QE provides the liquidity and supports the risk atmosphere, then I don’t see any reason why the rally should come to an end.”

IG Index’s technical analysis expert David Jones doesn’t think there is anything to worry about: “The break in September has given it a fresh pair of legs. It looks like there’s more momentum to come; any sign of weakness will offer a buying opportunity.” He encourages investors to pull out only if the MSCI Turkey Index falls to 2,600.

While there are numerous funds offering exposure to Turkey (the MSCI Emerging Markets Europe, Middle East and Africa Index, for instance) only iShares offers Turkey in single-market exposure in the UK at the moment.

For those attracted to investing in Turkey but cautious of single market exposure a multi-market investment might be the best bet. The consensus however is clear. Turkey has a lot of potential for growth. The providers’ plans are testament to that. HSBC for instance has committed to launching more single market exposure funds this year, Turkey rumoured to be one.

FAST FACTS | TURKEY

In 2001, the Turkish stock market lost half its value, but the economy recovered remarkably quickly.

By last summer, Turkey briefly boasted a credit-default-swap spread smaller than Italy’s.

Trade with neighbours Syria and Iran is increasing much faster than trade with the European Union.

Turkey’s biggest export sector is textiles, but automobiles and electronics are rapidly catching up.

Starting a business in Turkey takes a trim six days, compared to a global average of 36.