Turkey Stumbles, Brazil Sprints

03/08/2010 12:25 pm EST

Focus: GLOBAL

Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

With Istanbul shocked by coup plot allegations and Beijing playing shell games with dud loans, Sao Paolo remains the place to be, writes Carlton Delfeld in Around the World with ChartwellETF.com.

Turkish equity markets, which have been among the world’s top performers over the last year, hit some major bumps [recently] as the arrests over a recent coup plot and ongoing trouble in neighbor and longtime rival Greece spooked investors. The news sent the iShares MSCI Turkey ETF (NYSEArca: TUR) down 20% from its 2010 high on February 1st.

According to various sources, including the BBC and the Canadian press, prosecutors interrogated quite a few military officials about alleged plans to destabilize the country by blowing up mosques and provoking Greece into shooting down a Turkish plane over the Aegean Sea in order to trigger a coup and topple the government. This is James Bond stuff writ large.

Ironically, Standard & Poor’s upgraded Turkey's long-term foreign currency rating to BB from BB- and issued a positive outlook for the country, which suggests the likelihood of additional rating increases in the next year or two. The reduced debt burden and the stability of Turkish banks were behind the S&P decision. Although Turkey's debt market did not seem to respond to the news, the lira weakened. I am still an optimistic on the Turkey ETF and the Turkish lira.

[Elsewhere,] the debate over [the] Chinese debt bubble continues. Chinese state entities have a poor record in preventing faulty provincial lending practices and low-quality asset formation.

During the 1990s Asian financial crisis, the Guangdong International Trust went bust, [despite] an implicit Guangdong state government guarantee. Today’s seemingly solid balance sheets of the listed, state-controlled banks are the result of an $800-billion carve-out of nonperforming assets by four state-backed asset management companies, which are reportedly recovering only about 20 cents on the dollar. Looks like a shell game to me.

Jonathan Bell of Pictet Investment notes that “the investible universe of Chinese banks is inexpensive at 1.8x book value and less than ten times earnings, but this may be discounting poor asset quality.” If banks are cheap, then the iShares FTSE/Xinhua China 25 Index (NYSEArca: FXI) would be the call with 47% of its assets in the financial sector.

In Brazil, central bank chief Henrique Meirelles said he expects a "solid recovery" in the Brazilian economy, with investment driving growth. Gross domestic product is expected to rise 5.8% in 2010 after growing 0.2% last year, according to central bank forecasts. Foreign direct investment is projected to surge to $45 billion next year from $26 billion in 2009. Brazil remains my favorite emerging market, and I especially like the Market Vectors Brazil Small-Cap ETF (NYSEArca: BRF) because of its 40% exposure to [the] consumer product and service sectors.

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