The Global Bull Gobbles up a Turkish Delight

Truth be told, investing in Turkey is not for the fainthearted. When I first started managing money in global markets back in 1996, I quickly learned that Turkey was probably the most volatile and challenging stock market in the world (Taiwan was a close second). Turkey seemed to be in a state of perennial chaos, lurching from one political crisis to another. Yet, without exception, Turkey always managed to pull through somehow. And to be fair, Turkey since then has gotten its macroeconomic act together and its Central Bank brought inflation down from its 80%+ rates in the 1990s to high single digits today. Yet Turkey still loves to test investors’ mettle.

Last week, Turkey’s stock market soared after the country sidestepped yet another political crisis. Here’s a brief summary of events. Although it’s predominantly a Muslim country, Turkey has had a strong secularist tradition since the 1920s, and maintains strict separation between church and state. Recently, government prosecutors had called on the court to shut down Prime Minister Erdogan’s Justice and Development Party for trying to introduce Islamic law into the country and threatening Turkey’s strong secularist bent.

A high-court decision last week permitted the country’s Islamist ruling party to stay in power. Ironically, the court’s ruling in favor of the Islamist political party restores not only political stability in Turkey, but also business and consumer confidence. Islamist or not, the ruling party was doing the right things in terms of economic reform, and its victory puts back on track its agenda of privatizing banks and utilities, and restructuring national debt. The high court’s verdict was welcomed by European politicians, who feared that a prolonged crisis would take it off its track of eventually winning European Union membership.

The court’s ruling led to a quick round of upgrades from investment banks. JP Morgan Chase upgraded Turkey’s rating from “underweight” to “neutral.” Merrill Lynch issued an “overweight” rating on Turkish stocks, pointing out that Turkish equities trade at a 27% discount to the MSCI Emerging Markets index and also highlighted the strength of the Turkish lira. Goldman Sachs also recently reaffirmed its prediction that Turkey, Europe’s sixth-biggest economy today, will grow to be bigger than Japan, France and Italy by 2050.

The bottom line? As one analyst put it: “From the markets’ perspective, [the court’s decision] is possibly the best outcome." Another analyst added, "Now the most important Turkey-specific obstacle ahead of the bulls is lifted. Turkey must outperform now."

The best way to play the bounce in the Turkish markets is to buy the iShares MSCI Turkey ETF (TUR) and place your stop at $43.00. There are no options on this one. But given the volatility in the Turkish market, it’ll probably feel like you’re holding options. For that reason, you only may want to take half of your normal position size.

PORTFOLIO UPDATE

With the recent addition of the WisdomTree India Earnings ETF (EPI) and today’s bet on Turkey with the iShares MSCI Turkey ETF (TUR), we are beginning to dip our toes back in global stock markets on a highly selective basis. There are plenty of contrarian signs, particularly with respect to negative investor sentiment, that suggest that we are near a bottom in markets. But I remain cautious, and look to the market to confirm some of our recent bets in this area. Once markets do turn, look for very sharp gains and for “fear” to be transformed into “greed” almost overnight.

The WisdomTree India Earnings ETF (EPI) looks to have resumed its upward trend, with the ETF breaching the $20 level on Friday. Both the ETF and options are showing healthy gains, but hold on as this George Soros pick could be a big winner for us if we’ve caught it near the bottom.

Atwood Oceanics (ATW) also looks like it may have bottomed from a technical standpoint. Look for this stock, and the offshore oil drilling sector, to bounce strongly as oil prices stabilize.

The iPath DJ AIG Livestock TR Sub-Index ETN (COW) recovered to levels not seen since July 10. The iPath DJ AIG Aluminum TR Sub-Idx ETN (JJU) should recover along with a coming bounce in commodities prices.

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