Investors back Turkey, even if EU does not

Turkey’s application to join the EU has stalled for some time now, but as an investment destination, it remains one of the strongest stories anywhere in the world, managers tell Jonathan Boyd

Investors struggling to spot opportunity amid the financial chaos hitting the EU periphery could do worse than take a look at Turkey.

While the latter’s attempts to join the EU have come to nothing, as an investment destination it is one of the brightest stars, especially when compared to the CEE universe, say analysts.

Charles Robertson, global chief economist at Renaissance Capital says: “It is the third biggest market for equity investors after South Africa and Russia – and a much bigger deal than Hungary or the Czech Republic for example.”

Such is the attraction that BNP Paribas Assurance recently signed an exclusive distribution deal for 20 years with TEB and Fortis Bank Turkey. This will see life, pension and personal protection products distributed through Turkey’s ninth biggest bank by assets, with a network of 630 branches and 3 million retail clients out of Turkey’s 76 million people.

Turkish delight

Renaissance has just signed to become a member of the Istanbul Stock Exchange. Robertson says: ­“Foreigners already own about more than half the stock market, and much more than 10-20% of the local debt market, so it does appear that they are comfortable with Turkey.

“Like most brokers, we will ­inevitably service foreigners who dominate the stock exchange.”

Gokce Kabatepe, country head Turkey at Raiffeisen Investment, says there is a notable involvement of foreign investors in the ongoing M&A activity in the market, in sectors such as are energy, pharma, healthcare and services. He adds: “Turkey is one of the few remaining [markets] in the world with solid growth potential.”
Kabatepe says the basis for this is a stable political and economic environment for the last eight years, including what he says is “very ­successful single-party government – expected to stay in power for another [third] term after elections in June”.

Turkish Eurobonds currently have spreads tighter than most European countries, while its banking system is strong to the point of having capital adequacy ratios close to 20%, he adds.

Andreas Schwabe, research analyst at Raiffeisen Bank International, says that Turkey’s macroeconomic strengths are largely the result of its own banking crisis in 2001, and the subsequent economic reforms. Turkey did not have to call on the IMF during its recent V-shaped recession, even as GDP dropped 5%.

It has since bounced back to hit a growth rate of 9.2% by Q4 2010 and 8.9% for the full year. This was largely driven by household demand and investment, Schwabe says.

That annual growth rate was “clearly higher than Eastern Europe; these figures speak for themselves,” adds Jacob Grapengiesser, partner and senior adviser at East Capital, the Swedish asset manager known for its Eastern European and emerging ­markets funds.

He is positive in the long term, especially against CEE states such as Poland, the Czech Republic and ­Hungary. Comparing with Russia in the short term, however, is more difficult – one being a net energy exporter, the other a net importer at a time of high energy prices.

Turkish government debt is ­“manageable” in the region of 42% of GDP. Turkey is not like Russia – i.e. being in the position of a net ­creditor, but on the other hand ­neither did it have to take IMF help in the past couple of years, ­Grapengiesser says.

On a CEE ex-Russia basis, Marcin Fiejka, lead portfolio manager of Pioneer Funds – Emerging Europe and Mediterranean Equity at Pioneer Investments, says he would put more money in Turkey. He compares the situation to that around accession countries a decade ago.

“It’s like Poland ten years ago,” he says. “It has more catch-up potential.”
Russia looks good on the basis of commodity prices, and at the moment this means he would slightly favour Russia over Turkey. That said: “On a five-year basis, I would put money into Turkey.”

With growth for 2011 forecast at 5-6%, Turkey remains attractive, albeit with certain key issues facing investors. Besides the elections, bond investors have recently been pushing up yields on concerns over the methods used to combat inflation, and the economy is showing its ­sensitivity to energy prices.

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