Turkey has been a bright spot for emerging markets this year, nearly tripling the performance of other Emerging European countries. Tim Steinle, co-manager of the Eastern European Fund (EUROX), has just returned from a research trip to Turkey and reports the Turkish story is gaining momentum.
Industrial Production (IP) grew 11 percent during September compared with the same time period a year ago, reflecting the economy is getting stronger. Global investors are starting to take notice. Roughly $40 billion has flowed into emerging markets so far this year and just over 5 percent of those inflows ($2.3 billion) have landed in Turkey.
Some Central Emerging Europe-Middle East-Africa funds already allocate half of their assets in Turkey and recently some “go-anywhere” global funds have upped their allocations.
Some fear the strong recovery could trigger whiplash inflation but the Turkish central bank prefers to sterilize liquidity instead of raising interest rates in order to keep Turkey’s currency, the lira, from appreciating against its peers. One former central bank governor says that he hopes Turkey can follow in the fiscal footsteps of Brazil, which has been able to keep its own currency valuation under control despite rapid growth in the country’s economy.
The future looks bright for Turkey but there are some potential hurdles the country must overcome. Rising consumption, especially for energy, puts a strain on Turkey’s current account (i.e., the country’s balance sheet) and tilts the country’s trade balance toward imports.
However, Turkey envisions itself as the region’s energy transportation hub. Roughly 1.5 percent of the world’s oil goes through Turkish pipelines and several projects already under construction should ease the country’s energy dependence on foreign sources. In addition, tariffs on the oil and natural gas passing through the pipeline should offset some of the import costs.
Another hurdle is that Turkish Islamists and secularists hold extreme and opposing views, and the rift is deepened by the class divide of poor versus the elite. Will the wider masses take advantage of the new opportunities to better their lives or will the country swing toward theocracy like Saudi Arabia or Iran?
The entrepreneurial predisposition and the failed social experiment of the latter ought to keep that from happening.
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Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. The Eastern European Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.