EBRD host Turkey is investment magnet outpacing emerging market peers

LONDON Thu May 9, 2013 9:48am EDT

LONDON May 9 (Reuters) - In a neighbourhood mired in recession or political turmoil, Turkey is hosting the region's development bank as a dynamic economic leader rather than a needy recipient.

Record investment in its stocks and bonds is making its financial centre Istanbul, the venue for the annual meeting of the European Bank for Reconstruction and Development, look more akin to Wall Street than Warsaw.

Robust growth and company profits have powered dollar-based equity returns of around 18 percent, akin to the S&P500 in New York, while broader emerging stocks are barely in the black. Turkish bonds have returned around 7 percent.

While recession or stagnation grips eastern Europe, UBS strategist Manik Narain notes that predictions of 4 percent Turkish growth this year aren't far off what India expects.

Economic growth and falling inflation are translating into jobs, tax revenues and corporate profits. More than half the big and mid-cap companies that have reported first quarter earnings have beaten estimates, according to Thomson Reuters Starmine.

The fall in global oil prices may help the energy importer win higher credit ratings and lower interest rates.

"Turkey is a far more wholesome story these days than many other emerging markets," Narain at UBS said. "It is benefiting from being relabelled a fast-growth market alongside the likes of India, China and Indonesia."

Almost 500 funds in Lipper's Global Emerging Markets equity category have reported allocations to Turkey since end-2012. Average allocations were 3.3 percent at last count, up from 2.5 percent back in the first half of 2012.

And central bank data released on Thursday, showed that foreigners' holdings in Turkish equities rose $9.5 billion in the Dec 28-May 3 period to over $80 billion. Bond holdings jumped $9.5 billion to $71.8 billion, the bank said.

According to Standard Bank analysts, that suggests a record $150 billion in foreign portfolio holdings.

"At a time when Europe has been weak you would expect Turkey to do badly because of its current account deficit. But that's not been the case," said Waj Hashmi, a fund manager at Schroders which has significantly raised its allocations to Turkey.

"You have robust banks, low debt, good demographics and government reform."

ING Investment Management is underweight emerging stocks, reckoning they are in for a long period of underperformance. But in Turkey, it is overweight.

DISPENSING EBRD CASH

All that contrasts starkly with most countries that the EBRD operates in, whether it is Russia grappling with a commodity price slump or Egypt in political and financial crisis. This drove redemptions of $1.1 billion in Jan-April 2013, from the 600 emerging European equity funds tracked by Lipper

Unlike Poland and Hungary, which send three-quarters of their exports to the euro zone, Turkey has cut Europe's export share to under 40 percent by finding more markets. Iraq may soon overtake Germany as Turkey's biggest buyer, for everything from nappies to machinery.

JPMorgan Asset Management decided at the end of last year to scrap a fund that invested in shares of eastern European euro candidates and re-orient it toward Turkey.

Given the investor frenzy, it seems an anomaly that Turkey will get EBRD investments of over a billion euros this year. That's a tenth of the annual outlay of a bank created to support the economies of the former Soviet bloc.

Many say this cash can be better spent in central Europe or in the new client states of Egypt, Morocco, Tunisia and Jordan.

But the missing piece in Turkey's jigsaw is foreign direct investment rather than the volatile, yield-seeking kind. FDI plugs less than a fifth of Turkey's current account gap.

Here the EBRD's cash can make a difference, the bank says. It argues moreover that Turkey, with still-high poverty levels and inequality, can also be considered a transition economy.

"Everyone associates Turkey with its developed parts," bank president Suma Chakrabarti told Reuters. "There are gaps in its development which the EBRD is trying to address."

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