HSBC Global Asset Management puts faith in Turkey
HSBC Global Asset Management - one of the world's largest emerging market asset managers - has cited Turkey as a preferred emerging market.
The emerging markets team at HSBC Global Asset Management expects, following recent upgrades by rating agencies, that Turkey will reach investment grade status following the mid-2011 elections.
This follows a decade of structural reforms which has helped Turkey to pass the test of the global financial and economic crisis, which should help it to attract more global funds.
Nick Timberlake, Head of Emerging Market Equities at HSBC Global Asset Management, said Turkey is one of the key preferred markets across its broader emerging market portfolios. For example, Turkey comprises 1.87% of the MSCI World Emerging Market index but 6.3% of the HSBC GIF Global Emerging Markets Equity Fund. Another key overweight position is Russia.
Timberlake added: "Our emerging market portfolios have held an overweight position in Turkey for the past two years and have benefited from strong performance, however we still think there is value. With a 2011 price earnings ratio of 10.7x, Turkish equities still remain inexpensive, compared to the broader emerging markets universe (of 11.6x). We expect there will be further positive returns - though at a slower pace and the Turkish Lira will maintain its strength against a basket of the Euro and US dollar."
Anther reason behind the optimism is strong economic growth. Turkey is expected to have the highest GDP growth: 7.3% in 2010 and 4.5% in 2011(Source: Bloomberg Contributor Composite), in the Europe, Middle East and Africa (EMEA) universe. Turkish equities look more expensive than the broader EMEA universe (at 9.5x) but the higher growth estimates justifies Turkey's premium, Timberlake added.
In addition to investing in Turkish equities via its broader emerging markets funds, HSBC also offers the HSBC GIF Turkey Equity fund (total size USD$256m/€182m as at end of October 2010), managed from Istanbul by a team led by Ercan Güner. Since 10 July 2008 (when the fund converted to a pure equity strategy) to the end of October 2010, the portfolio has outperformed its benchmark by almost 19%, achieving 111.11% for the period while the MSCI Turkey index has returned 92.27%. (Past performance is no guarantee of future returns).
Güner said that Turkey is still a high beta proxy for global growth. Factors setting the stage for strong growth included the relatively low level of household and public debt. Household debt to GDP ratio is only 15%, one of the lowest in Europe. Public debt to GDP ratio is around 42% and Turkey is the only European economy that is expected to decrease this ratio in 2010.
"Turkey also features a solid banking sector which is well capitalised and still highly profitable. Interest rates meanwhile are at historic lows - in the single digits for the first time. Pent up domestic demand, low inventory levels, and a low level of financial penetration set the stage for further growth," he said.
The country also boasts highly favourable demographics. Turkey's 72m population is growing by 1.3% per annum and the average age of the population is 28. He added that local investors have low levels of stocks. However the historically low interest rates will inevitably increase local appetite for equities and this will be supportive for stock prices.
In terms of investment themes, Güner said industrial sectors were favoured to tap the recovery in manufacturing. Automotive, steel, fertiliser, energy, construction and aviation were the most favoured sectors by HSBC GIF Turkey Equity fund. Recently the weight of Turkish banks in the portfolio has been reduced due to relatively unfavourable earnings outlook in 2011.
The main risk to this market is the widening current account deficit. "However this appears not to be a significant threat in the near term given the strong level of capital inflows and rising trend in foreign reserves. Bulk of capital inflows are in the form of portfolio investments for now, however, I expect this to shift more towards foreign direct investment (FDI) and corporate sector borrowings if the Turkish economy keeps its current growth path," Güner said.
HSBC Global Asset Management is one of the world's largest emerging market managers with USD $93bn emerging markets assets under management (as at end July 2010)