turkey soft landing should be the envy of china

We all know emerging markets are not confined to Asia and South America, but often emerging Europe is neglected to our shame. Turkey is one country that has quietly been getting its house in order, and could teach the Chinese a thing or two about 'soft landings'.

turkey soft landing should be the envy of china


This boost in confidence for Prime Minister Tayyip Erdogan and the economic transformation he has engineered comes at a time investors are increasingly looking to the strategically important nation.

Fitch spoke of the underlying strengths and an easing of near-term risks for the economy in its accompanying report to the upgrade and chose to play down fears of the country becoming involved in Syria’s civil war.

But before it is included in benchmark investment grade bond indices, one of the other two big ratings agencies will have to second Fitch’s call.

In the meantime, the equity market in Turkey has been roaring ahead this year, with stock prices in Istanbul up more than 40% and trading within reach of all-time highs seen in 2010.

Does this mean the positive sentiment towards the country is already priced in then?

“Over the past 10 years the equity markets have therefore delivered much stronger performance than those in emerging markets overall. Experience has shown, however, that the majority of outperformance resulting from an upgrade occurs before the actual date of the upgrade.

“This means that the positive market sentiment may continue for the time being, but for lasting positive performance stock valuations will ultimately have to be backed up by the earnings development of the companies,” says Gregor Holek emerging market equities manager at Raiffeisen Capital Management in Vienna.

Longer-term story

Happily for Holek, he believes Turkey still has plenty working in its favour. So while it is no longer considered cheap supportive demographic trends and its key geostrategic location indicate persistent growth, which will be supported by lower inflation.

Schroders’ head of global emerging market equities, Allan Conway, also thinks Turkey continues to be attractive and says the country has remained resilient despite the eurozone problems happening just west of its borders.

This is no mean feat given considerable declines in Turkish exports to the EU, but perhaps surprisingly Turkey has benefited indirectly from the growing financial and economic difficulties of many developed countries.

Historically the country has battled with hyperinflation, but this has also been brought under control to settle at an annual rate of ‘only’ around 10% in the past decade, compared to an average of 60% to 70% between 1983 and 2001.

Holek predicts it might fall even further in 2012, possibly to 7%, allowing the government to lower interest rates lower in response.

Compared to the US and the core countries of the eurozone the interest rates are still high, however, and so foreign capital continues to flow into the country, which offers an attractive risk-return profile for financial and real investments.

Overweight Turkey

The Schroders emerging market equities team thinks the medium term story has further to run, reflected by its overweight position in the country in both its global emerging markets and emerging Europe funds.

Tom Wilson, co-manager of the funds, explains: "Turkey has a robust banking sector, good demographics with a young population and a growing work force, low levels of leverage and a good geographical position to grow exports to MENA/CIS as well as Europe. Government debt to GDP is also low, as is the fiscal deficit. Debt investors have consequently been willing to fund this Turkish growth story.

"One of the risks is that the government seeks to over-stimulate growth in 2013, given the oncoming electoral cycle. Stimulus will likely drive a recovery in consumption, which may reverse the current account improvement we have recently seen. We don’t currently see the likely scale of change as a problem for Turkey’s equity story, but we will keep on it."

Move over China, there’s a new strategically important nation in town, and by the sounds of things it has already managed its ‘soft landing’.



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