Should You Bank on Turkey’s Growth?

While much of Europe’s economy remains stuck in the mud, Turkey expanded 11 percent during the first quarter of 2011. In fact, Turkey’s economic growth outpaced China’s this quarter and most of the world’s larger economies last year, leading The Wall Street Journal to declare the country “Eurasia’s rising tiger.” Despite the acclaim, many investors have yet to warm up to Turkey.

We’re not one of them.

Turkey carries the second-largest country weighting in our Eastern European Fund (EUROX) and two members of our investment team were on the ground in Istanbul this week. They sat down with other money managers, analysts and company executives to expand their understanding of Turkey’s opportunities and find answers to pressing questions regarding the economy.

Our director of research, John Derrick, reported that there is substantial concern surrounding Turkey’s monetary policy. Even as the economy is revving up, the Turkish central bank refuses to raise rates because they expect inflation to slow. Tim Steinle, co-portfolio manager of EUROX, echoed that sentiment, adding that, following the re-election of Prime Minister Recep Tayyip Erdogan, it became clear that the central bank’s dovish stance was not election-year populism, but a firm policy choice.

This approach is clearly viewed as unorthodox. One bank argued that the central bank needs to immediately raise interest rates by as much as 400 basis points. The general consensus is the central bank should be more straight-forward and comprehensive to address the current account deficit (CAD).

Tim says that raising interest rates would be self-defeating at this point. Instead of stemming off money flows, it would enable a carry trade, meaning that it allows investors to sell a certain currency with a relatively low interest rate and use those funds to purchase a different currency yielding a higher interest rate. While it’s not the stated goal of the central bank policy, weaker currency is a direct way to address the CAD.

The country’s sizable deficit, which is currently 8.3 percent of GDP, means Turkey imported far more goods, services and transfers than it exported. This was due to strong domestic demand and components they needed to import only to then turn around and export. Tim pointed out rapid growth and capital inflows are good problems to have, compared with European neighbors. Now it becomes a matter of managing growth.

Due to the central bank’s current policies, quite a bit of repricing has already taken place and most banks are well prepared for rate increases if they ever come, as assets will now adjust by more than their liabilities going forward. Most are also seeing an increase in fee revenue, which is likely to offset the increase in funding costs. Non-performing loans are generally covered near 100 percent and capital ratios remain very strong.

The bank regulator, BRSF, has more or less imposed a 25 percent cap on loan growth this year. For the first half of the year, loan growth was about 36 percent; due to the restrictions, loans should slow materially during the second half. Also, for banks with more than 20 percent of loans from their consumers, the BRSF imposed an additional provision on consumer loans. Now the banks are on board.

In all, we’ve reaffirmed our longstanding positive view of Turkey (Read: Turkey as a Model of Middle East Stability). John says it’s a positive sign the country’s debt compared to its GDP has been decreasing. Fiscally, he believes the country is in good shape. Turkey also has a young demographic and a growing consumer class who’s already emerged. That’s our macro view.

On a micro, stock selection basis, John, Tim and the rest of the investment team are focused on quality companies with solid management teams that can offer the best returns on capital and growth at a reasonable price. Tying our macro view with bottom-up analysis is how we believe the fund has generated solid results for our long-term shareholders.

See which U.S. Global Funds Finished in the Top 30 for the Past 10 Years.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc. 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. The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

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About Frank Holmes 282 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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