As volatile equity markets stutter their way forward, one market leading the way as a global best performer is Turkey, yielding a 30% year-to-date dollar return.
Despite an expected short-term rebalancing in line with other markets, fund managers are optimistic about the medium to long term prospects for Turkey, according to HSBC Global Asset Management.
Ercan Guner, manager of the US$172 million HSBC GIF Turkey Equity fund, explained the Turkish economy performed well during the global economic downturn, due to low public and household debt, favourable demographics and a solid and profitable banking industry.
Boom and bust
Recent strong GDP growth rates of 9% in 2010 and 8.5% in 2011, are predicted to fall back to a more moderate but still respectable 3.6% in 2012, says the Central Bank of Turkey (CBT).
This would represent a soft landing rather than returning to the bad old boom and bust ways of the the Turkish economy typical in the 1990s, said Guner.
Although Europe is a major trading partner with 40% of all exports ending up in the European Union, Turkey has improved export performance in poor trading conditions by gaining market share across EU markets demanding cheaper products.
Another important factor underlying strong export performance was Turkey’s increasing trade with the Middle East and North Africa thanks to strong political and economic ties with the region.
Being highly dependent upon imports of energy and raw materials, the Turkish economy has also benefited from easing oil and commodity prices.
Strong earnings ratios
These combined factors have helped to reduce the sizable current account deficit, which reached 10% of GDP in 2011, whilst inflation has dropped to 9.1% from double digits in 2011 and is expected to decline further to 6.7% by year-end according to the CBT’s latest survey.
“Although the large current account deficit constitutes one of the main risks for the Turkish economy, we remain encouraged by the government’s recently-introduced incentive scheme to tackle the structural and long standing current account deficit problem over the long term and also by CBT’s flexible monetary policy over the short-term,” said Guner.
He explained that despite a strong year-to-date performance, the Turkish equity market remains inexpensive, with valuations trading on price earnings ratios of 10x, which is close to both the five-year historical average and the broader emerging market average.
Although Turkey wants to join the EU, the application is very much on hold due to lack of headway in aligning local laws with EU counterparts, and is likely to remain so for the foreseeable future.
