The May-June sell off mowed down all stock markets like a drunken professional boxer letting loose the latent power in his right hand in a bar full of non-fighters. It seems no matter where you looked, investors were nursing their cracked jaws and busted noses. Hong Kong. Japan. Brazil. There were more.
One of those particularly hard hit was Turkey, down about 45% in dollar terms in the space of about two months. The Wall Street-types will call it a correction. That is what I call a bloody route. As is my inclination, I am attracted to the aftermath of such calamities. I don’t always invest in trouble (ie, we’ve avoided newspaper stocks and auto parts suppliers, to name just two). But I often find it worthwhile to take a look and see if such indiscriminate smashing left some cold, unbroken bottles of beer still in the fridge.
Investing in Turkey: a problematic investment?
But Turkey? What possible allure could Turkey hold? Nestled between Greece and Syria, with the Black Sea to the north and the Mediterranean to the south, Turkey straddles the fuzzy line between Europe and Asia. Geography alone, however, does not define Turkey’s untidy place in the world. As the Financial Times observes: ‘Turkey is big, awkward, Muslim, poor, rural, rough-edged and not really European.’
Stitched together from the remains of the old defeated Ottoman Empire, Turkey is about 780,000 Sq Kilometers, with a population of 70 million people. And the classic stereotype doesn’t fit what is happening in Turkey today. As the Financial Times reports, Turks are ‘increasingly urban, gradually getting richer, at least officially secular and arguably neither more nor less religious than the Italians or Poles.’
In recent years, the economic picture in Turkey was a bright one. Its $350 billion economy grew by a third between 2002 and 2005. Price inflation, which was once running around 70% per year, was cut down to under 10%. It also became a hot spot for global tourism, especially for winter-weary Germans and Russians. Global capital flows poured steadily into Turkish markets. Things looked pretty good.
Vainly so far, Turkey has tried to gain access to the European Union. That’s because Turkey also has problems, the kind of problems the EU is not sure it wants to inherit. And the recent slide in emerging markets has exposed some of those problems in stark contours.
Investing in Turkey: emerging market risks
Price inflation is threatening once again. The lira is selling off, down 21% against the dollar since April. Unemployment is still high, around 11%. And I haven’t even discussed the political turbulence in the Kurdish south and an upcoming election for the embattled prime minister.
Though investors often forget – indeed, it often seems forgetfulness is as much a force in the market as fear and greed – they have not yet forgotten the meltdown in Turkey in 2000 and 2001, in which investors lost a lot of money. Based on the action in the market, investors seem worried such a setup exists again.
Bloomberg notes, ‘Turkey is closing in on Argentina as the country considered most likely to default on its bonds, according to prices in the swaps market.’ The price of insurance on Turkish bonds has more than doubled since May.
After all that, there is probably no chance you’ll invest in Turkey now. But price is the thing. Have prices come down enough so that they discount all that bad news and now represent good values for investors interested in the long-term story?
Investing in Turkey: a bargain buy?
For investors, the options look limited. There is the Turkish Investment Fund (TKF), which gives investors the advantage of owning a bunch of Turkish companies they otherwise couldn’t buy individually (at least not without great expense). As a general proxy on Turkey, the fund may make sense. I don’t like mutual funds all that much, even though I own a few. They are hard to analyze, and I much prefer a more targeted investment.
My experience investing in crises tells me that you don’t have to rush them. They take time to play out, and prices have a way of moving lower than anyone thought reasonably probable.
Yet a lower price doesn’t always mean a better buy. Grant’s Interest Rate Observer had an interesting interview with Arjun Divecha, who runs the $15 billion GMO Emerging Markets Fund. Since its inception in 1993, the fund has been among the better performers in its category. Divecha, commenting on Turkey, said: ‘The price has fallen less than the economic prospects; therefore, it’s more expensive. So in my view, it is not entirely true that stocks in Turkey are cheaper now than before the economic crisis. I wouldn’t call them cheap. I would say that their price is lower.’
It’s one of those little lessons every investor must learn, sometimes the hard way: Single-digit price-earnings ratios are not always bargains. And lower prices don’t always mean better values.
By Chris Mayer for The Daily Reckoning. You can read more from Chris and many others at www.dailyreckoning.co.uk
Christopher Mayer began his career in corporate banking after earning an MBA with a concentration in finance. His contrarian essays have appeared on a number of websites and publications including the Mises Institute, the Freeman, GoldEagle.com, LewRockwell.com, FiendBear.com, PrudentBear.com and Individual Investor Magazine.