This week, I am writing to you from the shadow of Turkey’s most famous mosque — the Hagia Sofia — and the center of the capital, Istanbul’s Sultanahmet historic district.
On New Year’s Eve, I will celebrate with friends at one of Istanbul’s most exclusive clubs, “360.” As it happens, Turkey was also the world’s hottest stock market in 2012. And I expect it to stay that way looking ahead into 2013.
Turkey: A Remarkable Economic Turnaround
When I was the portfolio manager for Canadas largest emerging-market fund in the 1990s, the joke among global portfolio managers was that “Turkey is the country of the future, and always will be.” Saddled with 80%-plus inflation rates and macroeconomic policy reminiscent of Latin America in the 1970s, Turkey was a poster child for economic instability throughout much of that decade. It was remarkably reliable in only one (unflattering) way. Sure as day follows night, you could always count on Turkeys economy — and stock market — to blow up on a regular basis.
Since then, Turkey’s reputation among the world’s emerging markets has undergone a remarkable transformation.
But first, a bit of background…
Strategically ensconced between the European West and the Islamic East, Turkey is a country of just under 75 million people — or roughly twice the population of California. While most of the investment world is fixed on the rise of China and Asia, this unheralded “economic tiger” of emerging markets grew at an average rate of 7.5% between 2002 and 2006, faster than any other OECD country — a club of the worlds “developed” economies. Turkey also bounced back from the credit crunch better than most other global economies with its gross domestic product (GDP) expanding 9% by 2010 and 8.3% in 2011.
Back in 2000, Turkeys GDP stood at $250 billion. Today, it has more than tripled to $775 billion. Had U.S. GDP grown at the same rate, the U.S. economy would be $31 trillion — about twice the size it is today. According to Forbes, Istanbul boasts an eye-popping 36 billionaires, putting it fifth in the world behind Moscow, New York City, London and Hong Kong. And as a country with a 99% Islamic population, Turkey has become a low-key economic role model for other Muslim countries following the “Arab Spring.”
Compared to a decade ago, the difference in Istanbul’s streets is palpable. While other Islamic cities like Cairo, Egypt, are stuck in a time warp, Istanbul today is in better shape than many Eastern European capitals, some of which are already part of the European Union. The public transportation system is brand-spanking new. The clubs along the Bosporus are legendary in the summer for attracting the biggest entertainment names in the world. Istrikal, Istanbul’s most famous (and European) pedestrian street, boasts everything from the city’s leading night clubs to the NBA’s first store outside of the United States. That said, taxi drivers are still just as willing to “take you for a ride” as ever — as one did with me just yesterday.
So what accounts for Turkey’s remarkable transformation?
Since 2001, Turkey has been run by a largely pro-business, single-party government headed by neo-Islamist Justice and Development party Prime Minister Recep Tayyip Erdogan. It has overseen the tripling of Turkey’s GDP, the emergence of a strong middle class and the development of an entrepreneurial culture. Public debt as a ratio of GDP stands at only around 40% — about half of the European Union average. In November, Fitch Ratings upgraded Turkey sovereign debt to “BBB-,” the lowest rung on the investment-grade level — its first investment grade rating in 18 years. Once either Moody’s or S&P follows Fitch’s lead, as much as $2.5 billion is expected to flow into Turkish Eurobonds. And therein is the opportunity. Any time a country attains an investment grade from two ratings agencies, as Colombia did in 2010, positive investor sentiment spilled over to the stock market, unleashing a massive move upward.
I believe a wall of money is set to go into Turkey once it gets its second investment upgrade. That’s why I recommended that my Alpha Investor Letter subscribers to invest in Turkey just after the news from Fitch ratings.
Based on my experience on the ground here over the past few days, I recommend you do the same.
Chart of the Week
The Turkish market was essentially a no-go zone for U.S. investors until the launch of the iShares MSCI Turkey Invest Market Index (TUR) in June 2008, a current recommendation in my newsletter, The Alpha Investor Letter, as well as a position I hold for my clients at my firm Global Guru Capital. Turkey was one of the hottest-performing global stock markets of 2012, gaining 60.35% year to date. I expect it to continue into 2013 as TUR still trades for a reasonable nine times trailing earnings.
A word of warning: although it has gotten its macroeconomic act together, the Turkish stock market is about twice as volatile as the S&P 500. So strap yourself in, and hang on for the ride.
To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.
Nicholas Vardy, CFA
Editor, The Global Guru