April 27, 2012 Leave a comment
Turkey is different. Most countries which are considered Emerging Markets today are new players on the world stage. Turkey is not, in fact they held the stage for more than 6 centuries (America has only held it for 2). In the 1900′s the Ottoman Empire fell apart. After defeat in World War I the it was divided up, and Turkey was left with just the Anatolia Peninsula. Then in 1923 Turkey split all ties from the Ottoman Empire and became simply The Republic of Turkey, and in 1952 Turkey joined NATO. This was the turnaround point for Turkey. They were seen as a bastion for the free world in an area of vastly expanding Soviet powers. Back in those days (and today…) the US was willing to throw free money at any country who would carry out their beliefs in different areas of the world. Since 1952 US investment in Turkey has done nothing but rise, and has once again made Turkey significant.
Turkey is different economically. Most emerging markets are heavily reliant on commodities and energy for their growth. For comparative purposes I’ll look at Peru (EPU) in comparison to Turkey (TUR) as they both have had similar rates of growth over the last few years.
Above are the holdings for EPU (top) and TUR (bottom) . EPU’s holdings look pretty standard for most emerging markets, overweight in the materials sector. However Turkey is really the only emerging market who is overweight in financials and consumer companies. Materials are just 9% of the holdings.
So what? Most of these material/commodity companies in emerging markets are strongly correlated with China. Because of this link these companies, and countries, took off alongside China over the last decade. However with the imminent slowing of China on the horizon, there is the risk of a major demand cutback. China’s economy is becoming more reliant on consumer spending, and less so on construction and industrial output; therefore, their demand for material goods may decrease sharply over the next few years. This is going to have an extremely negative impact on the emerging economies that rely on China’s consistent growth in order to grow themselves.
OK that makes sense but what does that have to do with Turkey? In our world of low interest rates and low returns, most investors are counting on emerging markets for their growth opportunities. However if what I outlined above comes to fruition, these growth opportunities may turn in to outright liabilities. That’s where Turkey comes in. Turkey is not linked with a sustained raw materials demand from China. Turkey’s GDP has grown at over 8% (8.3% last year) over the last 5 years, and has done so without relying on selling raw materials to a then growing China. That is why Turkey is poised to flourish in a world where very few growth opportunities remain. Turkey’s growth is more correlated with sustained consumption. As shown above most of their holdings are banks and telecommunication companies. This (to me) is a sign that they should not be lumped in with other emerging markets.
Is this growth sustainable? As I outlined above, growth in many emerging market economies is not sustainable at current levels. Once again, Turkey is different.
The above data is from the World Bank. The main point I’m trying to get across with the chart above relates to most investors main concern with Turkey: Turkey relies too much on Foreign Direct Investment.
Yes, FDI is huge for Turkey. As I mentioned in the first paragraph, if it wasn’t for FDI Turkey would not be where it is today. Some say that if FDI levels drop off, Turkey will drop with it. That is clearly not the case. FDI levels were very high in ’06 and ’07 when Turkey’s GDP was growing by 9%. However its clear that in ’09 and ’10 those levels dropped, but GDP growth did not drop with it. Even with less than half of the Foreign Direct Investment levels seen in ’07, Turkey’s economy still expanded by 8.3%. This is a sign that they have reached a point of relative stability, and will be able to sustain themselves to a certain extent even if FDI does begin to dry up.
Another positive sign for Turkey is a steadily declining unemployment rate. Turkey’s unemployment was down to 8.9% in the most recent quarter. That is a lower unemployment rate than the Euro area (10.8%) and very close to the USA’s (8.2%). As mentioned above, Turkey’s economy is driven by consumption, and to have disposable income most consumers need to be employed. This low unemployment level supports the claim that the general population of Turkey is growing in wealth, which will lead to an increased capacity to consume/spend. If unemployment remains low, and the middle class continues to get wealthier, the outlook for banks and consumer industries (57% of TUR’s holdings) looks very bright.
In conclusion Turkey is different. TUR is a way to diversify emerging market exposure away from raw materials and dependence on China. Turkey offers investors the ability to play the rising middle class in the years to come, while avoiding the slowdowns in most of the developed world. Turkey is at a critical crossroad of the world geographically, and they may play a critical role financially in the years to come.
Disclosure: I am long TUR.