Pocket of Strength: Turkey Retail Stocks Rally

To add alpha, we believe investors need to continually seek pockets of strength amidst today’s mire of pessimism. One bright spot we’ve seen lies just east of Greece: Turkey.

Many investors believe banks are the only investment play in Turkey. The sole question for those investors is to hold or not to hold banks. Here’s what we think is a better strategy: Invest in undervalued, diverse, smaller companies that will benefit from a resilient consumer, low unemployment rate and sound government policies.

Among young people, Turkey’s unemployment rate is considerably lower than many countries in Europe, including Spain, Greece, Ireland and Italy. Germany is the only country with a lower unemployment rate than Turkey. This low rate translates to a vibrant, young workforce with rising wealth.

Even though Turkey has a strong domestic market, it often faces a current account deficit, meaning total imports are greater than the country’s total exports. (Turkey’s dependency on energy imports, for example, makes the country vulnerable to oil prices. As the price of oil increases, Turkey’s current account deficit grows, and vice versa.)

This external vulnerability is one of the reasons why Standard & Poor’s recently reaffirmed Turkey’s lira-denominated bond rating of BBB- and its foreign exchange credit rating of BB. In its report, S&P based its view on Turkey’s current account receipts, its modest income levels and risks related to the credit boom of last year. S&P says that Turkey’s GDP growth was “mostly driven by rapid domestic credit expansion, financed mainly by short-term external funding to banks.”

However, S&P explained that the current ratings are supported by its view of Turkey’s “generally effective policymaking and institutions, its moderate and declining public debt burden, and its monetary policy flexibility.”

At the CFA Conference in Chicago attended by our director of research, John Derrick, Sam Zell discussed his key theses on investing in emerging markets. Sam believes one should be invested for a few years before a country becomes investment grade because leaders tend to implement responsible policies in line with rating agencies’ requirements.

To improve its credit rating over the long-term—and to reduce its current account deficit—Turkey has been implementing policies that encourage an increase in the domestic production of goods and makes its exports more competitive to attract capital. For example, Turkish mining law is investment-friendly, as there is little bureaucratic control, an easy permitting process, and lower fees, and allows broader activities for companies involved in mining gold, copper and boron. These policies will likely encourage mining companies to dig up the natural resources under Turkey rather than head to another country.

Case Study: Tale of Two Turkish Stocks

Of those companies that can capitalize on Turkey’s consumer strengths—retailers, glass makers and manufacturers of automobiles, washing machines and refrigerators—we focus on growth-at-a-reasonable-price (GARP) companies. We believe these undervalued companies that have revenues growing faster than GDP, are profitable and are well-run with a focus on building shareholder value are the most attractive investments.

Turkish food manufacturer Ülker (ULKER) fits the bill, trading at 15 times 2012 estimated earnings. Ülker owns the household-name Godiva. The luxury chocolate brand has 275 company-owned and managed specialty boutiques in North America alone, and is sold in more than 80 countries around the world. After reporting that first-quarter profits had more than tripled, the stock rose to all-time highs, during a time other emerging markets stocks were declining.

Other global brands, though they exhibit growth traits, are expensive. Coca-Cola Icecek (CCI) is one of the fastest-growing bottlers among Coca-Cola’s universe, with about 70 percent of its revenue coming from domestic sales, according to Morgan Stanley Research. However, the stock seems pricey, with a 2012 price-to-earnings ratio of 23 times.

The market has begun to recognize Turkey’s strengths this year, especially in the retail sector. As you can see below, Turkish retail equities have rallied significantly since the start of 2012. These stocks have already surged well beyond the 2008 peak and pushed through the 2011 high last month.

Turkey’s Accessible Market

According to Russell Investments, Turkey has the largest and most liquid small-cap market among emerging market countries. Whereas many small caps in emerging countries take a few days to trade, in Turkey, it only takes one day, on average, to build a position. This reduces the liquidity risk inherent in international small companies, and for an active manager, provides flexibility for selling stocks as the market rises and taking advantage of dips on the down days.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund’s alpha. The Istanbul Stock Exchange National 100 Index (XU100) is a capitalization-weighted index composed of National Market listed companies in the retail trade industry. None of U.S. Global Investors Funds held any of the securities mentioned as of 3/31/12.
About Frank Holmes 263 Articles

Affiliation: U.S. Global Investors

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.”

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications.

Visit: U.S. Global Investors

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