Avoid the Professional Jive Turkeys when Investing in the Istanbul 100
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Turkey is a great investment for Americans, however, Americans looking for great investing in Turkey will have a difficult time.
Sure, Western-investors interested in anything remotely Turkey-related can buy what Coca-Cola CEO Mukhtar Kent and Western Union CEO Hikmet Ersek are selling, or they can acquire shares of NYSE-traded Turkcell. However, the iShares ETFs – the US-listed MSCI Turkey Investable Market Index Fund (NYSEMKT: TUR) and UK-listed MSCI Turkey (LSE: ITKY) – not to mention Morgan Stanley's lackluster Turkish Investment Fund (NYSE: TKF) are largely inadequate for those wishing to fully capture and make discerning choices in their Turkish investments. Like Colombia and Mongolia, Turkey is a good bet across the board (and requires less selectivity than other heavily touted markets like Indonesia or Vietnam). However, the currently available funds have some shortcomings.
First of all, the funds are heavily weighted with financial stocks – TUR (43%), ITKY (49%), TKF (43%) – which tends to be overrepresented in most emerging market ETFs. Most emerging market funds also tend to be heavy on energy or a single resource, though this is not a problem with the Turkish funds which only hold 5-7% in energy stocks. Also, while Turkey is not self-sufficient in oil and natural gas (though it is the conduit for a number of Arab and former-Soviet sources), it does hold a significant mix of mineral resources and has the world's fifth largest capacity for geothermal (which has barely been tapped). While energy and finance are obvious entry points in most developing economies, Turkey should be perceived less as at the top of the emerging economies, and appreciated more as at the bottom of the advanced economies (though climbing rapidly). Although overall returns from the finance sector have been high for Turkey, recent moves by the government to curb “over exuberance” do not bode well for the financial sector in the near term. Government can do few things reliably, but when it sets out to suppress earnings, it is hard for it to fail. NYSE-TKF and LSE-ITKY make smarter moves than MSCI's American counterpart, AMEX-TUR, by putting a heavier weighting on Garanti Bank (ISE: GARAN) – not only destined to be the largest bank in the country (as the state banks wither or restructure), but currently also the most innovative and popular. Still, the financials-centric approach remains a problem for all the funds in such a diverse and functional economy as Turkey where a number of entities have their own financing resources to drawn upon.
For instance, the long established Borusan Group which expects to meet or exceed last years sales of $4.3 billion (up 22% from the previous year) is represented (.25%) in the AMEX-TUR by its steel subsidiary Borusan Mannesmann (ISE: BRSAN) – though not at all in the LSE-ITKY or NYSE-TKF. Yet other parts of this emerging international powerhouse, such as its investment arm Borusan Yatirim (ISE: BRYAT), are not included at all.
Second, while the AMEX-TUR covers four times as many stocks as the LSE-ITKY and NYSE-TKF, the vast majority of the long-term growth in Turkey is going to come from its small- and medium-sized enterprises. While the heavy emphasis on the banking sector in the funds is an attempt to remedy this gaping hole in their strategies, it is inadequate. For the most part, the banks selected are Istanbul-beholden and are not the ones most likely to be aligned with the aggressive growth companies coming out of Anatolia.
Third, certain large interests are either underrepresented or entirely absent. Originally a Swiss concern, the Turkey-based Migros (ISE: MGROS) is not included in either fund, and is shaping up to be the force that challenges Costco and sweeps Wal-Mart from its positions in emerging and transitional markets. The Turkish Koc conglomerate recently sold its share in Migros to an American privaty equity firm for $2.5 billion, and its other subsidiaries and Turkish competitors such as Ramstore, Mavi, Tema Magazacilik (LC Waikiki), and Koton are competing head-to-head with Spain's pride and joy Zara (BMAD: ITX) in places as far away as Colombia. Either way those battles shake out, Migros under its current leadership is likely to be one of the few European retailers to make it to the next level of the global competition.
Turkey’s quality manufacturing, reputation for service, and aggressive foreign policy in other emerging markets in Africa and Asia bodes well for arms sales as well as its consumer and construction players which already dominate the former Soviet Union and are using their 10 million migrants in the rest of Europe as a base to eat into other local markets. Also, among the 57-member states of the Organisation of Islamic Cooperation (which claims a combined population of 1.4 billion - and excludes the 180 million Muslims in India), Turkish brands already occupy half of the top 25 spots according to New York-based DinarStandard, a Muslim-focused consulting firm. (Not bad considering only a handful of the member states use a Turkic language, and even most of those have a totally different alphabet.)
Another area in which the funds fall short is the Turkish defense sector which has benefited from (and contributed to) the American, European, and Israeli establishments. Turkish Aerospace Industries and its numerous subsidiaries, suppliers, and partners continues to be a well-regarded institution and since 1984 has been steadily climbing the chart of the world's top 100 aerospace and defense companies. TAI was originally a joint-venture with Lockheed Martin (NYSE: LMT) and General Electric (NYSE: GE) and still retains strong links to both. In 1948, General Electric became the first multinational to set up shop in Turkey, and launched the country's aviation industry. The Turkish aviation consortium renewed its partnership with GE for another 25 years in 2010. Moreover, though GE only retains a 2% holding in Garanti, it has continued to expand its activities in real estate and media with Garanti's parent Dogus Group. Dogus is one of the three conglomerates that dominates the Turkish economy, and has shown this century to be the most successful of the trio in branching out beyond its domestic market.
Since sales of the Joint Strike Fighter (F-35) to Turkey could exceed $16 billion, it is no surprise that JSF-lead Lockheed remains the biggest contributor to the Washington, D.C.-based American Turkish Council (the primary trade group for US-Turkic business interests). The Turkish airforce's purchases may be even more important to Lockheed due to reduced orders expected from the cash-strapped EU participants (four of the eight current partners) – as well as the (indefinite) postponement of other financially troubled EU members like Spain joining the program. However, on another major contract, the Turkish navy may not be finalizing a $3 billion joint project with Lockheed and opt instead for a domestically developed system.
The Turkish military is the second largest in Europe (and unlike most has substantial experience and high-quality air and naval components). It remains a key link in US security arrangements for three continents, and produces competitive products for situations as varied as its own geographies and circumstances. Furthermore, unlike with certain national vendors, purchases of Turkish-sourced weaponry and service packages are less of a political headache for a number of buyers in various camps. Moreover, unlike Taiwan which still technically claims Tibet, Mongolia, and other territories once part of the 1912 Republic of China, the 1923 Republic of Turkey has stayed true to Ataturk’s directive to concentrate on the Anatolian heartland and has satisfied its irredentism through other means carried out by its vibrant missionary and business cultures. Even in northern Iraq, a flashpoint for a range of reasons, massive Turkish investments there (beyond simply oil) show signs of further integrating the large Kurdish minority of southeastern Turkey into the rapidly growing and diversified Turkish economy.
Nick Slepko has no position in any company mentioned here at the time of publication. The Motley Fool owns shares of Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.