It's Time to Talk Turkey

07/28/2010 1:00 pm EST

Focus: ETFS

Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carl Delfeld, editor of Around the World with ChartwellETF.com, says the country is an emerging economic power at the crossroads of Europe and the Middle East.

Emerging-market exchange traded funds (ETFs), mutual, and hedge funds saw inflows of $17.3 billion in the first half of this year, according to Emerging Portfolio Fund Research.

Managers looking for growth are by default looking to emerging markets. Over the past three years, emerging and frontier markets—those markets considered so small that they don't even fit into the "emerging" category—are down 7.5%, according to MSCI data. The All-Country World Index ex-US is down 15.8%.

This week’s focus is on Turkey, a country that is under most investor’s radar.

Only ten years ago, Turkey had a budget deficit of 16% of gross domestic product and inflation of 72%. Just last week, it reported a remarkable 11%-plus first-quarter GDP [growth]. Furthermore, it is well under the European Union’s fiscal guidelines of a 60% ceiling on government debt, at 49% of GDP, and could well get its annual budget deficit below the 3% benchmark next year.

That leaves reducing inflation, now running at 8%, as the only remaining major policy challenge.

But does Turkey need, or even want, to be a member of the EU. Perhaps it dodged a bullet? Turkey is about one-third the size of Mexico and the 18th largest by population with over 72 million people. That's seven million more than France, ten million more than the United Kingdom and more than double [that of] Canada.

Turkey’s GDP ranks 18th in the world, equal to about half that of South Korea. More than a quarter of Turkey's 72.6 million people are under 15 years of age, while just 6% are over 65. Turkey is younger than China, where 19% are under 15.

Turkey, trading at just ten times earnings, is a fast-rising economic power, with a core of internationally competitive companies that are turning the youthful nation into an entrepreneurial hub, tapping cash-rich export markets in Russia and the Middle East while attracting billions of [dollars of] investments to boot.

The rise to power of Turkey has coincided with that of Prime Minister Recep Tayyip Erdogan, who has combined social conservatism with fiscally cautious economic policies to make his Justice and Development Party, or AKP, the most dominant political movement in Turkey since the early days of the republic.

Turkey has expanded commercial ties with Israel, Russia, Saudi Arabia, Iran, and Syria that now underpin its ambition to become the dominant political actor in the region.

iShares MSCI Turkey Investable Market Index (NYSEArca: TUR) is definitely top heavy, with financials four of the top five holdings, over one-third of the entire ETF's holdings. The other one of the top five is Turkcell (NYSE: TKC), a regional telecom.

Turkey seems to me to be a core holding of any global equity portfolio. (The ETF closed above $62 Tuesday—Editor.)

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