One of the biggest losers from the taper has been Turkey.
The country was already struggling with a trade deficit. And now, thanks to the Fed, dollars are flowing out of the country.
Throw in a political crisis, and it’s easy to see why the Turkish stock market has plunged.
The lira has lost around 20% of its value against the US dollar in a matter of months. The stock market has fared even worse. In sterling terms, it’s dropped by a third since the start of December.
Sounds like the perfect place for a bold investor to go bargain hunting…
Why Turkey is better than it looks
Other than Argentina, it’s hard to find a country that’s been harder hit by the emerging markets ‘crisis’ than Turkey. But believe it or not, I think now could be a good time to buy in if you’re willing to bear some risk.
A big reason for the panic is political turmoil. If you’re interested in the details, you can check out my colleague Cris Sholto Heaton’s recent briefing on Turkey.
But in short, around 60 major political figures are under investigation for corruption. So – as you do – Prime Minister Erdogan has fired the prosecutors, sparking another showdown between the courts and the government.
This comes on top of a heavy-handed crackdown on protests last summer, which has led to criticism that he is moving the country away from democracy.
These are serious problems. They shouldn’t be ignored. But it is worth putting them into context. Turkey is still one of the most stable and relatively open countries in the region. It’s also a member of Nato.
Even if the current turmoil brings down Erdogan’s government, the transition is likely to be peaceful. Indeed, the crisis could benefit Turkey if it splits the two Islamist factions, allowing more moderate parties to take power.
And its external politics look less grim. Turkey has moved to repair relations with Israel. The Syrian crisis is also bolstering its position as a more moderate alternative to Saudi Arabia and the other Gulf states.
It’s even making progress on negotiations with the European Union, though a trade deal is a more likely outcome than full membership.
So while the political situation is fraught, it’s not as disastrous as it might seem at first glance.
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The exciting oil deals that could slash Turkey’s deficit
Turkey is also finally sorting out its energy supply problems. The main reason behind Turkey’s big trade deficit is that it has to import most of its energy. Electricity use is expected to rise by 7.5% a year until 2020. Natural gas consumption is set to rise at 3% a year in the same period. So that’s a recipe for an ever-growing deficit.
The government has attacked the problem in two main ways. Firstly, it has opened up the energy sector to private and foreign involvement. This should allow more money to be invested in refineries. Modernised refineries should cut costs and prices for industry and consumers.
The second is to find new energy sources. One big project is a potential pipeline to northern Iraq (Kurdistan). Although the oil from this pipeline will still be imported, it will be cheaper than Turkey’s current suppliers.
Until now, progress on the pipeline has been slow due to Turkey’s poor relations with the Kurdish population, as well as reluctance from Baghdad. The Iraqi government doesn’t want to do anything that could lead to the north of the country splitting off altogether.
The good news is that Turkey recently agreed a deal in principle with Kurdistan. While it is still negotiating with the Iraqi government, it looks like it will accede to the request. This alone would deliver a major boost to the Turkish economy, and go a long way to solving the problem of the deficit.
Energy costs could fall further if shale gas takes off in Turkey. In September drilling began in the Dadas basin. This area is thought to contain six billion cubic meters and could meet Turkey’s demands for at least four decades.
Other major companies, such as Shell, are exploring for oil in a different part of the country.
The main reason to buy – this market is cheap
But the best reason to invest in Turkey is quite simple – it’s cheap, especially its banking sector. As Samuel Vecht of Blackrock Emerging Europe points out, the six largest banks in Turkey are worth the same as their equivalents in Qatar. That’s despite the fact that Turkey’s economic output is six times larger and it has a population of more than 74 million compared to Qatar’s two million.
While the latest turmoil is expected to hit growth, Capital Economics still thinks GDP will expand by 2.5% this year, rising to 4.5% in 2015. Yet the stock market trades at under seven times 2015 earnings and at only an 8% premium to current book value (net assets of the companies).
In contrast the MSCI World Index trades at over twice its book value and at 13x 2015 earnings.
If you’re tempted to invest in Turkey, there are two ways to do it. The most direct is via a tracker fund, such as iShares MSCI Turkey (LSE: ITKY).
A more diversified option is an actively-managed fund such as the Blackrock Emerging Europe (LSE: BEEP) investment trust. While it invests across Asia and Eastern Europe, it has a large chunk of its portfolio in Turkish shares. Even though it has beaten its benchmark over one, three and five-year periods, it still trades at a 7% discount to its net asset value.
By the way, if this has whetted your appetite, a quick heads-up – my colleague David C Stevenson is currently putting together his pick of the ‘frontier markets’ for MoneyWeek magazine. His story will appear in the mag in the next couple of weeks – if you’re not already a subscriber, you should make sure you catch it by signing up to get your first three issues free now.
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