Investing in Europe's Fastest-Growing Economy
Turkey’s roaring economy has earned it the nickname “New Tiger” among foreign investors — who are pouring money into a country that spans Europe, Asia and the Middle East in one of the most volatile regions of the world.
Is that a risky investment strategy? Most experts say no. With its security provided by its NATO membership and a secular government in place, Turkey is a stable country, even as it allegedly trains rebels seeking to overthrow Bashar Assad as president of neighboring Syria.
Inflationary woes and its current account deficit are more a worry than political risk, say experts.
“The risk-reward ratio of investing in Turkey at the moment is possibly one of the highest in the world,” said Serkan Gur, executive director at Crossbridge Capital.
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It’s one of the safest houses in a dodgy emerging markets neighborhood. Turkey weathered the global financial crisis better than most, and is rewarding investors with growth spurred by a young and educated workforce, modern infrastructure, a large domestic market, multiple free trade agreements and a liberal and reformist investment climate.
“Turkey is a stable country in an unstable part of the world,” said Russ Koesterich, global chief investment strategist for BlackRock's iShares ETF business. “You don’t have some of the problems with emerging markets like Russia.”
There is a flip side, of course. Some observers worry that Islamicization is rising, Turkey continues to tussle with Syria, and its efforts to join the European Union have stalled until it recognizes the Republic of Cyprus, an EU member since 2004.
Heyrick Bond-Gunning, managing director of Salamanca Risk Management, warns that while “Turkey has made considerable advancement in fighting corruption during the last decade, this is still considered a high business risk.”
Further, he says, “the judiciary is heavily influenced by the government, and companies have described ‘questionable decisions’ in favor of the government over international companies.” Bond-Gunning cautioned that Turkey’s economy is heavily reliant on Europe, its biggest export market.
But Turkey posted an impressive 34.78 percent return as of July 31 on the Russell Global Index, fiercely outperforming the euro zone countries. Tom Goodwin, senior research director for Russell Indexes, said he expects the payoff from equities to remain high in the near term. Furthermore, Turkey stimulated its export sectors by keeping the lira competitive against the euro and other developed currencies.
“Investment in Turkey became mainstream quite a few years back, especially when the government showed and proved its willingness to tame inflation and promote further internationalization of the Turkish economy,” said Philippe Carré, global head of connectivity for SunGard’s global trading business.
“Turkey is seen as a relatively low-risk investment play, though —apart from more knowledgeable investors — reserved for larger institutions able to weather large exogenous shocks.”
The Turkish economy rebounded from a severe crisis in 2000-2001 to emerge as the fastest-growing economy among the OECD countries and second fastest among G-20 countries, with a growth rate of 9 percent in 2010 and 8.5 percent in 2011. It is on track to become the leading OECD economy through 2017, with annual growth to average 6.7 percent.
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Direct international investment hit $15.9 billion in 2011, a 75.7 percent jump from 2010. Turkey is a destination for capital for wealthy Middle East investors who want to keep some money outside of countries riddled with unrest from the Arab Spring.
“I think Turkey is one of the strongest emerging markets out there right now,” said Ian Bremmer, president of Eurasia Group, a risk-analysis consultancy. It boasts a “stable government, good demographics, access to lots of interesting markets (and well diversified), a pretty decent financial system and corporate governance.”
Islam permeates the culture and influences business behavior. But most Turkish banks are secular, and the country appeals to multinational corporations. Turkey’s strife with its neighbors including Iraq and Iran, along with its support of Sunni-backed political parties, isn’t hurting returns. “My sense is that investors have shrugged that off,” said Goodwin.
“Turkey’s government is in place since eight years now, and their public support is ever increasing,” said Gur. “This ensures political stability, the continuity of fiscal discipline and financial growth. The support is not only domestic but also international.”