If you look at the chart of the Istanbul Stock Exchange your gut instinct is to cut and run. But is that the best strategy for an emerging market with great upside potential?
Like other emerging markets, Turkey is taking it beating from inflation. So far, the government's policies have kept inflation below 10% -- putting it a notch above China.
Let's face it: inflation is wreaking havoc on all markets, including the U.S. In fact, inflation is probably the biggest cause of volatility in emerging markets today. For investors, that leaves that basically leaves two choices: 1) go into something stable like bonds or 2) get in at the bottom and ride out a market that has the legs for long-term growth.
Turkey's economic fundamentals tell me that long-term growth is the way to play the Istanbul Stock Exchange. And the best way to get in now is through the ISE National 100 Index. Since it reflects the performance of the Istanbul Stock Exchange, the chart below may lead you think that Turkey is in deep trouble. However, if you discount the effects of inflation, Turkey has the potential to be a good place to put your money for the next few years.
One of the most important aspects of investing in emerging markets is government stability. The largely Muslim nation is on a quest to make important reforms for the 21st century.
The government, a parliamentary democracy, is attempting to rewrite the basis for Islamic sharia law (a body of Islamic tenets that form the legal system). The goal here is to establish a modern interpretation of Islam that combines Muslim beliefs with European and western philosophical methods and principles.
At the same time, Turkey's infrastructure is also being modernized.
The government is undertaking the $32-billion Southeastern Anatolia Project (GAP), an ambitious dam and irrigation plan that has the twin goal of providing Turkey with much needed electricity. On May 27, Turkish Prime Minister Recep Tayyip Erdogan announced that his government would complete the decades-old project in the next five years. It's the latest effort in Turkey's plan to build several dams to dramatically increase hydro power for both manufacturing and agriculture.
While tourism is a major source of income for Turkey, few investors realize that agriculture is an economic mainstay. Turkey is the world's largest producer of hazelnut, fig, apricot, cherry, quince and pomegranate; the second largest producer of watermelon, cucumber and chickpea; the third largest producer of tomato, eggplant, green pepper, lentil and pistachio. Other significant crops include sugar beet, tobacco and tea.
Meanwhile, Turkey's manufacturing is surprisingly successful.
Turkey ranked 21 worldwide in terms of industrial production output in 2005. The largest industries are textiles, oil refining, agriculture, steel and automotive.
You may be shocked to know that Turkey is also ranked as Europe's sixth largest automotive producer. Many are joint ventures. Turkish factories crank out vehicles under the badges of Oyak/Renault, Hyundai/Assan and Ford/Otosan.
The other big surprise is TVs. Yes, Turkey's Vestel Electronics is the largest TV maker in Europe, accounting for 25% of all TV sets manufactured and sold on the continent. Vestel and its rival Turkish BEKO accounted for more than half of all TV sets manufactured in Europe.
Building things seems to be second nature in Turkey. The country's construction and contracting industry is one of the leading in the world. Twenty-two Turkish construction/contracting companies were selected for the Top International Contractors List prepared by the Engineering News-Record in 2007. This achievement made the Turkish construction/contracting industry the world's 3rd largest in that year, ranking behind those of the USA and China.
In many ways, Turkey seems to be a blue-chip of emerging markets. It lacks the flash of China, India and Brazil, while relying on a history of steady economic growth. It has established manufacturing, progressive government and strong trade ties to the developed world. It also has a mature agricultural sector, which could pay off as food prices continue to rise.
With inflation being a great equalizer across emerging markets, Turkey could be a good long-term opportunity.
--Irwin Greenstein
