In a sea of stagnation in Europe, the only CIVETS member close to the Old Continent has been a standout. Turkey is projected to grow +5.2% in 2010. Since making serious economic reforms around the turn of the century, Turkey has been firing on all cylinders — in contrast to neighboring archrival Greece, which is mired in economic mismanagement.
Even though only a tiny part of Turkey is in Europe — most of the country is actually located in Asia Minor past the straits of Bosporus — the E.U. will get a huge new market, positive demographics, and a vast opportunity for economic development if it admits it as a member.
Turkey’s economy is quite fragmented between the more advanced western part of the country and more rural eastern part. In addition, the state is diminishing its role in the economy with an active privatization program.
The country had a huge problem with high inflation for many years, in effect creating a dual system where dollars and Deutsche Marks (due to the huge Turkish minority in Germany) and later Euros were accepted as a form of payment without need for currency exchange. The Turkish lira (TRY) cannot match the success of the Brazilian real (BRL), but it has been much better managed in the past 10 years after a similar currency reform.
The country is not particularly rich in natural resources like many South American economies, which is why there is an issue with a relatively high current account deficit. The central bank is trying to keep a firmer currency policy with high real interest rates and so far it has been relatively successful. The rise of the Turkish consumer, as well as the ability of the country to become a low-cost manufacturing base for Europe, offers a lot of promise.
The Turkish stock market has done very well amid the reforms. The index is lira-denominated (not as hard of a currency as Brazil’s, but it’s much better than the Argentine peso). In the U.S. we have the choice between one ETF, one closed-end fund and one ADR.
In our case the closed-end fund — The Turkish Investment Fund (NYSE: TKF) — is the better deal as it trades at an 8.7% NAV discount.
The fund is run by Morgan Stanley Investment Management, but is not particularly actively managed; many closed-end funds aren’t too active. The closed-end fund has similar top stocks as the MSCI Turkey Investable Market Index ETF (NYSE: TUR) and similar weightings in the top holdings. The top stock in both is the bank Turkiye Garati Bankasi (18.3% weight in TKF and 14.5% in TUR).
Because of the similar weights and the NAV discount, I would go with the closed-end fund. The fund is invested in the following sectors: Financials (38.89%), Consumer Goods (19.42%), Industrials (10.95%), Telecommunications (9.25%), Oil & Gas (7.23%), Consumer Services (5.06%), and Utilities (0.72%). Banks do great in rapidly growing economies so overall this is play on both Turkish financials and domestic demand.
The only listed ADR available to U.S. investors is Turkcell (NYSE: TKC), a major Turkish mobile operator. This is a dividend play at present trading at 12 times earnings and yielding 4.2%. The company has 26 million pre-paid subscribers (the more popular way in that part of the world) and 9.4 million contract subscribers. There are also regional investments in Azerbaijan, Georgia, Kazakhstan and Moldova, Ukraine and Belarus, which will help growth in coming years. The penetration rate is high, but getting more customers to sign contracts will be beneficial and necessary to keep the dividend solid.
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