Turkey: A Reminder that Emerging Markets are Not Always Warm and Fuzzy

by The Sizemore Investment Letter
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Submitted by Sizemore Investment Letter as part of our contributors program

When you hear a mention of Turkey, it conjures up certain mental images.  The Aya Sofya in Istanbul…ships passing through the Bosphorus…mustachioed men selling doner kebabs out of pushcarts.

And, unfortunately, military coups d’état and baton-wielding riot police.

Turkey has become a little softer around the edges over the past decade as economic growth and political reform have made the country more Western in many respects.  And investors had begun to notice.

In May of this year, Turkey was upgraded to “investment grade” by Moody’s, the ratings agency, and up until recently the country was enjoying “China-like” growth rates in the high single digits.  Investors had begun to lose interest in the high-profile “BRICs” countries and had started looking elsewhere for growth, and Turkey seemed a fine destination.

From January of 2012 to the recent high in May of this year, the Turkish stock market was up by more than 80%.  And this is even more noteworthy when you consider that the European Union—Turkey’s most important trading partner—has been mired in recession and crisis for most of that time.

And then it all came crashing to a halt.  From its May 22 high, the Turkish market is down nearly 20% and the iShares MSCI Turkey ETF ($TUR)—the primary vehicle for most American investors to get access to the Turkish market—is down further.

What happened?  A series of riots broke out across the country demanding that a popular park be spared from development, and the prime minister—who, though controversial, has up until now been broadly popular—reacted the way you might have expected a Turkish general of old to react: with crushing force.

Fearing political instability and a return to Turkey’s chaotic past, investors dumped their shares and fled the Turkish markets.

So what now?  After the bloodletting, are Turkish stocks attractive again?

I would like to say yes.  Even after their spectacular gains of recent years, Turkish stocks are among the cheapest in the world, trading at just 10 times earnings.  You would have to go to neighboring Greece or to places not known for being friendly to investors—think Argentina or Russia—to find cheaper.

Yet you don’t want to try to catch a falling knife.  If the hot money has decided that the Turkish “story” is over, then it will take them time to unwind their positions and move on, which will mean more downside pressure in the near term.

I, for one, still like the Turkish growth story, and I expect that 6 months from now these riots will be a distant memory.  But I sold my shares of TUR and I do not intend to buy them back until the dust settles.

Action to take: Put TUR on your watch list.  This is a great long-term growth play.  But wait until prices have stabilized to buy.   Alternatively, you can take a play out of John Templeton’s playbook and place GTC limit orders at prices far below today’s market price.  That way, if the market gets pushed temporarily lower due to panic selling, you can snag shares on the cheap.

This article first appeared on TraderPlanet.

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