Should You Invest in Turkey?



Over the past year, Turkey has been riddled with inflation and social unrest.  As a result the Turkish stock market — the ISE National 100 Index — has lost about a third of its value since May. If we translate this decline into dollar terms, the decline is closer to 50 percent.

But despite the social unrest and the collapsing stock market, I think it may be time for contrarian investors to consider taking a position in Turkish stocks. Historically, the best time to make an investment is when it is unloved, and when it is viewed as risky. This means that the right time to invest is when there is a lot of bad news, and when the media is filled with reports citing reasons to avoid the asset in question.

While investors often shy away from such situations, they forget that as prices come down, risk actually declines while potential reward increases. This is the case because if an asset trades at a lower price then it offers better value. Furthermore, as prices come down, there are fewer sellers left to drive the price down even further. While such reasoning cannot necessarily be applied to the shares of individual companies — which can fall to zero in bankruptcy — it does apply to broader stock market indexes.

Ultimately, I think that the bad news facing Turkey amounts to short-term noise, and it is helpful to take a step back and view the longer-term picture. The fact is that Turkey’s economy has been growing substantially since the turn of the century — GNP has more than doubled. Furthermore, despite all of the negative headlines Turkey’s GDP grew at a 4.4 percent annualized rate in the third-quarter.

Turkey’s workforce is young, growing, and very productive when its constituents aren’t protesting.  A young workforce is extremely positive for a nation’s economy because younger workers become more productive as they age. The same will almost certainly hold true for Turkey in the coming years and decades. As a result, Turkish citizens will contribute more to the global economy over time, and their demand for consumer goods will increase. The company’s involved today will be likely beneficiaries.

Skeptics should also note that Turkey’s government has a very conservative fiscal policy, and it is reducing its debt as a percentage of GDP. This data point has fallen by more than 50 percent since 2001 from 77 percent to 32 percent, and the trend continues lower. These three points tell me that there is a significant long-term opportunity in shares of Turkish companies.

That isn’t to say that there aren’t problems with Turkey’s economy.  Aside from social unrest, which is related to economic problems, there are two issues that potential investors need to take note of before committing money to the Turkish stock market. First, Turkey has a high trade deficit. The figure became extreme over the summer, exceeding $10 billion. However, it has begun to revert back to a normal level of $7 billion in recent months.

Second, inflation is high and the Turkish Lira is falling rapidly in value. The Lira has lost more than a fifth of its value against the Dollar in the past year. This means that prices are rising, and that foreigners do not want to export to Turkey for fear of receiving a depreciating currency in exchange for their goods. This led the Turkish central bank to announce that it is instituting a huge overnight lending rate hike from 7.75 percent to 12 percent. This is likely going to slow down economic activity in the coming months. Nevertheless, it also signals that there is a good chance that the Turkish economy can regain its footing and continue to grow once the excesses have been weeded out. As a result, we saw the iShares Turkey ETF (NYSEARCA:TUR) rise by over 4 percent in after-hours trading yesterday.

Ultimately, while investing in Turkey is somewhat risky, as is the case with all emerging market investments, it seems that we have reached a point where investors are expecting the worst while they neglect the aforementioned positive attributes of the Turkish economy. Therefore, I think that investors should consider taking a position in the aforementioned Turkey ETF. Furthermore, I think investors can do this now. The fund is down from a high of $77/share to $44/share. It traded to just below $41/share on Friday, which is a significant technical level. There is now a double bottom in place at this level which first acted as support towards the beginning of 2012 just before the Turkish stock market surged.

As of now, Turkish stocks aren’t incredibly cheap, but they are far cheaper than American stocks. According to the iShares Turkey ETF webpage, the fund trades at a price to earnings ratio of 11.6. This is half of the price to earnings ratio for the S&P 500. It also trades at 2.5-times book value versus the S&P which trades at 4.6-times book value. While I expect volatility to continue for some time the aforementioned longer term, bullish trends will prevail and this will lead Turkish stocks higher in the long run.