Contrarian play on high-risk Turkey

Sam Vecht, fund manager of BlackRock Emerging Europe (BEEP), recently revealed he has recently put 20 per cent of the fund into Turkish equities.

Echoeing Buffett’s famous quote, Mr Vecht said: "Having been underweight Turkey for three years we have gone overweight. It may not correct next week or next month but buying makes sense. It will be choppy but offers compelling value and it pays to be brave when others are fearful."

The MSCI Turkey index fell 26 per cent in USD terms in 2013, following a 64 per cent rise in 2012.

More recently, there has been a great deal of bad news attached to Turkey with some of the main risks being that Turkey’s socio-political turmoil will affect its economy and growth. For the past two months, Turkey has been in the throes of a massive corruption scandal affecting the country’s political leadership.

At the end of January, the Turkish central bank raised its overnight lending rate to 12 per cent from 7.75 per cent after an emergency meeting. The move was intended to help stabilise the value of the lira, which had plunged amid ongoing turmoil across emerging markets.

However, proponents argue that the base case for Turkey remains strong. The country has a large population of young people, a highly adaptable and dynamic private sector, a flexible economy, due to absence of influential unions or excessive regulation, good infrastructure and an extremely important geostrategic position.

There are also some great businesses based in Turkey. Mr Vecht is especially bullish on Turkish banks, with Turkiye Garanti Bankasi accounting for 9 per cent of his portfolio, and with Garanti Bank and Halkbank also among the trust's 15 largest holdings. A recent BBC series on the MINT economies described Turkish white goods manufacturer Beko and Turkish Airlines, the world's fastest growing airline, as having the 'wow' factor.

However, the biggest argument in favour of Turkish equities are that they are cheap - the MSCI Turkey index has a PE ratio of 7.92 per cent.

Investors who want to access the country can do it through a diversified actively managed fund such as BEEP, or Templeton Emerging Markets (TEM) which has 5 per cent of its assets in Turkey.

However, for investors who want to manage their portfolio actively using asset allocation to trackers, there are 9 exchange traded funds (ETFs) traded on the London Stock Exchange that give access to Turkish equities.

Of these, the one that gets the highest rating from Morningstar analysts is the HSBC MSCI Turkey UCITS ETF GBP (HTRY). This aims to replicate the performance of the MSCI Turkey Index. The MSCI Turkey Index is designed to measure the performance of the large and mid-cap segments of the Turkish market. With 25 constituents, the index covers about 85 per cent of the equity universe in Turkey.

Even if you agree with Sam Vecht’s contrarian stance, this ETF should only account for a very small portion of your portfolio. But if you are prepared to buy and hold for the very long term, you could reap big rewards. Buy.

Source: Investors Chronicle and HSBC

Fund and index cumulative performance % (to 31 December 2013)

TOP 10 HOLDINGS (as at 31 December 2013)

SECTOR BREAKDOWN (as at 31 December 2013)

MSCI TURKEY INDEX USD ANNUAL PERFORMANCE (%)