Ten years ago, most investors would have been hard pressed to make a case for betting on the Turkish economy while keeping a straight face; the eastern European nation had a budget deficit equal to 16% of GDP and inflation as high as 72%. Moreover, the Turkish lira endured a dramatic depreciation and ultimate revaluation; at one point it took 1.65 million lira to purchase one U.S. dollar. But after years of sound fiscal policies, prudent government spending, and a few lucky breaks, Turkey has been transformed into one of the world’s most promising economies. “Today, Turkey is a fast-rising economic power, with a core of internationally competitive companies turning the youthful nation into an entrepreneurial hub, tapping cash-rich export markets in Russia and the Middle East while attracting billions of investment dollars in return,” writes Landon Thomas.
Turkey has long tried to join the European Union, and has been consistently denied. But now the country is closer to meeting admission criteria, and boasts a degree of economic stability that few current members of the euro zone can claim. At 49% of GDP, Turkey’s government debt is well below the ceiling set (and occasionally ignored) by the EU. Perhaps the last hurdle to EU membership is inflation, which currently stands around 8%, or well above the 3% benchmark. Some analysts think Turkey will soon be eligible to join the EU, noting that the beleaguered union may now jump at the opportunity to bring another eastern Europe member into the fold.
Joining the EU and adopting the drowning euro may seem like a risky move in the current environment, but it comes with its fair share of advantages as well. While the euro may seem unstable, Turkey’s currency has already failed once, and it may alleviate concerns if the country were to adopt a currency that is 27 countries strong. Joining the euro zone would also open up new markets for Turkey, potentially allowing the economy to keep up its impressive growth rate–it expanded by an eye-popping 11.4% last quarter alone.
For investors seeking to make a play on the expanding economy in Turkey, there is of course an interesting ETF option out there:
iShares MSCI Turkey Investable Market Index Fund (TUR)
This ETF tracks the MSCI Turkey Investable Market Index, a benchmark that measures the performance of the Turkish equity market. With its top three holdings consisting of Turkish banks, it is no surprise that this fund allocates over half of its assets to the financials sector; industrial materials and telecom also make up a significant portions of TUR [see the entire sector breakdown here]. Amid a ferocious financial crisis in Europe, TUR has shown the Turkish economy’s resilience by posting a gain of over 6% on the year. By comparison, the broad-based SPY is down almost 5% on the year. Even diversified emerging market ETFs lag far behind Turkey; EEM is down almost 6% in 2010 [see more at Israel, Turkey ETFs In Focus As Another Showdown Looms]. From an expense perspective, TUR charges 0.63%.
Turkey is included in most emerging market ETFs, but generally receives only a minor allocation. For investors with the willingness to take on a little more risk, TUR could make an interesting play, especially as European banks undergo stress testing in coming weeks. If Turkey is indeed headed to the euro zone, this ETF could flourish.
Disclosure: No positions at time of writing.