As Thanksgiving hosts across the country focus intently on preparing a proper turkey, opportunistic investors have been considering another kind of Turkey product: the iShares MSCI Turkey Investable Market Index Fund (TUR). Turkey isn’t even on the radar screens of most investors, but this Mediterranean nation has a unique economy and a potentially attractive risk / return profile.
The Republic of Turkey borders the Mediterranean Sea and is approximately the size of Texas and home to some 71 million people. The country is currently at a very important point in its young life: coming years will determine whether it will either continue to develop and eventually be admitted to the EU or be marred by regional strife and suffer the fate of its destabilized neighbors. These are two very different paths (likely with two very different outcomes for investors in Turkish markets), meaning that there is significant risk in an investment in TUR. Despite the risks, Turkey should survive many Thanksgivings to come, and could be a valuable part of a well-diversified portfolio for investors that have a moderate to high risk tolerance.
Young Population & EU Relations
With an average age of just 27.7 years, Turkey has a very young population. This fact, together with a generally positive relationship between Turkey and the European Union, lead many to believe that the country will eventually join the EU. Such an admission would help the bloc bring down the average age of its citizens, since for the most part Europe is experiencing either flat or negative population growth.
Despite the cultural differences between Turkey and developed Europe, the two have a great deal in common economically: four of Turkey’s top five export destinations are European Union members. While all are not on board with the Turkish plan, Carl Bildt, the Swedish foreign minister recently said, “It would give the EU a decisive role for stability in the eastern part of the Mediterranean and the Black Sea, which is clearly in the strategic interest of Europe.”
If Turkey continues to grow and develop, it will become more linked to the fortunes of Europe, and in turn Europe will become more linked to Turkey. Turkey is already a NATO member, an OECD member, and a member of the Council of Europe, all three of which are mostly comprised of European countries, so inclusion in the EU isn’t at all far-fetched.
For an emerging market, Turkey has a robust transportation network, including the 13th largest road network (even larger than the United Kingdom) in the world and the 19th largest rail network. The Turks have even begun to build a high speed rail system between their two major cities that travels over 150/mph, and currently have the most investment in transport with private participation at over $3 billion.
This focus on infrastructure will help ensure that Turkey uses its strategic location at the crossroads of Europe and the Middle East to its advantage. Should Turkey become a manufacturing hub for the region it would have a huge supply of rich consumers only a few hundred miles away in both the European Union and the wealthy Gulf States. It seems likely that Turkey, thanks to its importance as a shipping center, could become a transit hub for the entire region.
While Turkey’s strategic location between Europe and the Middle East brings potential economic benefits, it also introduces several significant risk factors. Turkey finds itself in a geopoltical hotzone, bordering its historic rival Greece, as well as the powder kegs of Syria, Iraq, and Iran. Turkey also borders Georgia, which fought a war against the Russians in 2008.
Even within Turkey, tensions often run high. The Kurdish minority in the east of the country has often demanded the ability to break off from Turkey and form an independent country, requiring the Turkish government to perform a difficult balancing act. Between keeping the Kurds under control, protecting human rights enough to satisfy the European Union, and keeping a watchful eye on its neighbors, there are a number of challenges and potential threats to stability.
How to Invest
While Turkey is a component of most emerging markets ETFs, its small size relative to the BRIC countries means that it is usually given a relatively minor allocation in these funds. For investors looking to make a pure-play on Turkey, TUR is one of the best options. This fund, with an expense ratio of 0.63%, seeks to track the MSCI Turkey Investable Market Index, which consists of stocks listed on the Istanbul Stock Exchange. Although it is a diversified fund, TUR focuses heavily on the financial sector – more than half of the fund’s assets are invested in financial firms. Rounding out the top three sectors are telecommunications at 12.7% and industrials at 10.7%.
Over the past 52 weeks the fund has performed remarkably well, up over 150% as investors have regained appetite for risk and looked beyond the U.S. for investment opportunities.
Considering the country’s growth prospects, TUR has a very low PE of 16.4. Thanks to its significant holdings in financial companies, is able to pay a yield of over 4.7%, making it a quality option for long term investors who are able to stomach the volatility that comes with a single-country emerging market ETF.
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Disclosure: No positions at time of writing.