This Market Is No Turkey

08/05/2009 1:00 pm EST

Focus: ETFS

John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, says the Turkish economy is growing nicely and its stock market is trading at a big discount.

It’s hard to find many markets that are as misunderstood as Turkey. While it sits at the intersection of Europe, Asia, and the Middle East, Turkey doesn’t quite belong in any of those three baskets from a cultural or investment perspective.

And it’s certainly exotic. Ask a typical American broker or financial planner about China or India, and he’ll enthusiastically rattle off facts and figures, along with a few investment ideas. Ask about Turkey and you’ll probably get a blank stare or a joke about Thanksgiving.

But what’s really odd is that Turkey hasn’t gotten more attention. While not as rich as its European neighbors, Turkey is considerably further along the economic development curve than many emerging markets. With per capita GDP of about $9,000, Turkey is far more prosperous than Brazil, China, or India.

True, Turkey has had its share of economic and political instability. Back in the early 1990s, inflation rates of 1,000% or more were the norm. And while inflation is now under control—it was just 5.7% in June—Turkey has been absolutely clobbered by the global economic downturn. Turkish GDP collapsed nearly 14% in the first quarter of 2009, and there’s a good chance [it] will need a helping hand from the IMF.

A lot of the bad news and misunderstanding appears to be priced into Turkish stocks. At current levels, the MSCI Turkey index trades at less than 14x earnings and [twice] book value. By comparison, MSCI’s Emerging Markets index has a P/E multiple of 18x and sells for 2.8x book value.

Before the global credit crisis began to unfold, the Turkish economy was growing at a 6% annual clip in the five years through 2008. According to Merrill Lynch, Turkey has a good chance to resume growth in the 4.5% to 5.5% range starting sometime next year. The stabilization or resumption of economic growth could be a powerful catalyst for the Turkish stock market in the years to come.

The iShares MSCI Turkey Investable Market Index exchange traded fund (NYSEArca: TUR) is one of the few US-listed securities that offers broad access to the Turkish market. One drawback is the fund’s somewhat lopsided concentration in a handful of sectors. Financials, telecom, and industrials make up 72% of the fund. The largest holding, at nearly 14% of assets, is Turkiye Garanti Bankasi, Turkey's largest bank.

Turkcell (nyse: TKC), the country’s leading mobile telecom service provider, is the fund’s second largest position. The industrial category includes companies such as Sabanci Holding, a conglomerate with interests ranging from cement to insurance. (TUR closed near $47.50 Tuesday—Editor.)

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