Investing in Turkey

Turkey

Bond Investing

With interest rates being at all time low and the Federal Reserve undertaking Operation Twist whereby $40 million of fixed income securities (MBSs) are purchased indefinitely, investing in the bond market might not seem too attractive. Bond prices move in opposite direction of interest rates – so if you’re long the fixed income market you are betting that interest rates will decrease, hence increasing the value of the bond you hold.  Given the low interest rates environment, investors should be looking at higher yields in non -US sovereign debt.  Our top- down approach will direct us where in the world we want to invest. Destination -> Turkey

Quick Facts:

• ·      Population : 75 million

• ·      GDP Growth : 8.5% (2010 – 2011)

• ·      Stock Exchange Growth : 310%

• ·      Financial Sector Assets (241$ billion in 2006, 710$ billion in 2012)

• ·      Credit Rating : BB+ (Fitch) Ba1 (Moody’s) BB (Standard and Poors)

As we have previously mentioned in our weekly reviews, we have been closely watching Turkey’s economy.  Istanbul is slowly becoming an international finance center as the country’s GDP growth was 8.5% last year – one of the fastest among major economies. Turkey has a youthful population ( half the population is under the age of 29) and is relatively politically stable when compared to other emerging markets.  In June 2012, Moody’s Investors Service upgraded Turkey’s government bond ratings to Ba1 from Ba2 and has continued to maintain a positive outlook. Turkish banks prove to be overcapitalized with a capital to risk assets ratio of 16.5% (more than double of what's legally required).

Turkey’s local-currency bonds have returned 13 percent this year compared with 9 percent for Russia according to JPMorgan Chase & Co. indexes. Brazil and Turkey offers investors the highest yields on their two-year debt among 18 emerging markets tracked by Bloomberg.   Turkey’s record high current account deficit (imports>exports) shrank to its lowest in 3 years to $1.18 billion from 4$ billion. which reflects lower demand combined with an increase in gold exports. The decrease in imports represents a decrease in consumption which in turn will result in the the government stimulating the economy and lowering rates - the cost of borrowing. Rate cuts of at least 50 bps are expected in the upcoming weeks. The bank already cut the gap between its overnight lending and borrowing rate by 150 bps in September and hinted that it would continue its rate cuts to support growth.

Foreign Direct Investment has also been rising. Turkey’s growth has been noticed particularly by Japan who has substantially raised its investment in Turkish debt.  Japanese investors have invested over $3 billion funds in Turkey in 2012. Mizuho Financial Group Inc. and Mistubishi Corp opened offices this past year.  

Sector --> We recommend investing in Turkey’s energy producers. Turkey is an important energy corridor in Europe connecting East and West. The Turkish Electricity Transmission Company estimates that Turkey’s demand for electricity will increase at an annual rate of six percent between 2009 and 2023.

Company --> Aksa Enerji Uretim (AS) is Turkey’s biggest nongovernment power producer.  Aksa has a target of $1.1 billion of revenue this year. Aksa Enerji has acquired rights to extract an estimated 39 million metric tons of brown coal, or lignite, in the area for 35 years.  Also, Goldman Sachs has a 13% ownership in the company.

 Contact us for a detailed analysis on the company's fundamentals.

Foreign Direct Investment Inflows

Anna Nepravishta

Weekly Review - 10.07.2012

 

• The most important figure of the past week came out on the last day of the week – U.S unemployment numbers.  The jobless rate declined from 8.1 % to 7.8% (12.1M/ (115.6M+27.3M+12.1M) as 114,000 jobs were added.  This definitely boosts Obama’s campaign one month before the election, especially after his poor debate with Romney. Romney on the other hand disputed that the lower unemployment rate is only due to a decrease of the workforce as a result of discouraged workers who stop looking for employment.

• The markets responded favourably as share prices increased to the positive four year low unemployment data, while safe heaven securities such as Treasury notes tumbled.  Gold retreated by 0.6% to $1,777 an ounce given the positive news.  However gold will most likely remain a top commodity choice as the possibility of a “fiscal cliff” approaches.

• Another election campaign coming to an end south of the border is that of Hugo Chavez Venezuela’s president and Henrique Capriles Radonski – the opposition candidate who has a lead in the polls. This could  bring a lot of change to Venezuela’s currently nationalized financial institutions and utilities/steel companies.  If Capriles takes office, he will decentralize control and dismantle policies such as currency and price controls while allowing more foreign direct investment to boost the economy.  

• On the other side of ocean, European markets also rose as the European Central Bank reinforced its willingness to buy Spain’s bonds if it requested aid. Europe’s move to a more unified union be it monetary or fiscal continues as France, Malta, Spain, Italy and Portugal released a joint statement to push the European Council in establishing a single European banking supervision system in which states would jointly back their banks.

• Europe’s debt crisis has also affected China, a large trade partner with Europe, who is preparing to show weaker earnings in the third quarter.  Technology and materials companies originate a big portion of their revenues from China which could be potentially putting them at disappointing third quarter performance. The Chinese index is trading at its cheapest since 2008 which is attractive for investors while the Republic struggles to reduce the economy’s dependence on exports and boost consumption. China along with the other three emerging markets (the BRICs) have shown signs of a slow down. Last year $5.4 billion investments flowed out of the BRICs.   
• Goldman Sachs has moved beyond the Big Four. The  latest emerging market acronym is MIST – Mexico, Indonesia, South Korea and Turkey. Mexico’s benchmark IPC Index climbed 11 % this year, compared with a 2.8 % increase in  Brazil's Bovespa. Mexico continues to compete with China for manufacturing as costs are climbing in the Asian nation.  Turkeys ISE National increased 28 % and  Indonesia's Jakarta Index gained 7.4%. Out of the MISTs, Turkey stands out with a 8.5% growth in the economy last year.

Happy Thanksgiving and stay tuned for next week's review!

Hugo Chavez and Henrique Capriles Radonski

Anna Nepravishta