CHAPTER 7

Turkey

KNOCKING AT THE DOOR

The Turks must be laughing at the events unfolding in the West. For such a long time they have been seeking acceptance into the European Union in order to be viewed as an equal partner with the West. They argue location, straddling both Europe and Asia on the map. They argue military cooperation as the biggest Islamic NATO member. They argue economy, as the owners of one of the fastest growing economies in the world. And, they argue Greece. If that bankrupt nation can be part of the eurozone, then why not Turkey? Well, the answer has been that Turkey was not ready economically to join the first-world nations. In truth, it has more to do with the West’s lack of acceptance of an Islamic country into its fold. Of course, no one will ever say that publicly except for the Turks. Well, the last laugh, it appears, is for them to enjoy. As the eurozone falls apart thanks to countries like Greece, Turkey is looking pretty golden right now even with its problems, and problems it has.

Turkey is a Tier 1 emerging market. It’s very well developed, as it should be. The Turks have played a major part in world history for over 2,000 years. Turkey’s largest city, Istanbul, once known as Constantinople, was the seat of the Roman empire under Emperor Constantine, who was the first major emperor to embrace Christianity. It is in Istanbul that you will find the magnificent domed cathedral called Hagia Sophia, or Saint Sophia, the predecessor to future domed Catholic cathedrals, including St. Peter’s in the Vatican.

There are few cities in the world that can compare to Istanbul. As you cruise down the Bosphorus from the Black Sea, you see the magnificent minarets of the massive mosques that dot the skyline. Built on numerous hills, like Rome, anyone viewing Istanbul from the sea for the first time is usually taken aback by its beauty. The Bosphorus empties into the Sea of Marmara, which then empties into the Mediterranean and the Aegean seas. Turkey occupies a very strategic location, bordering Syria and Iraq to the north, Georgia and Iran to the east, and Bulgaria to the west. It has been part of the major global trade routes as long as any written history has been recorded.

At the height of its modern history, Turkey was home to the Ottoman Empire, borne out of Mongol rule. The Ottoman Empire controlled parts of Europe, the Middle East, and North Africa from the fourteenth century until the beginning of the twentieth century, reaching the peak of its power in the sixteenth and seventeenth centuries. At odds with the Catholic empires of Europe and the Austro-Hungarian empires for much of its modern history, the Ottomans fell from grace completely around the First World War. It was after this time that modern Turkey began to take shape. It did so, and successfully, by embracing a secular leader, Mustafa Kemal Ataturk, father of the Turks, who gained fame as a military leader. Ataturk vowed that Turkey would become a secular country with the backing of a strong military force dedicated to keeping it that way. Turkey also abandoned the traditional Turkish alphabet in favor of the Roman alphabet, further distinguishing itself from its Arab and Muslim neighbors.

But Turkey’s modern history, while impressive under Ottoman rule, pales in comparison to its ancient history. It is in Turkey that you will find the magnificent ruins of Ephesus and Troy. It is where you will find the House of the Virgin Mary, where Saint John took her to spend her days until her Assumption. The Turks have played a part in history that few others can claim. Much of this is thanks to the Greeks who are not fond of the Turks—the feeling is mutual. They even share an island, Cyprus, over which they are constantly at odds, with the Greeks controlling one side and the Turks the other. Cyprus has been used by the European Union as a pawn in negotiations with the Turks in regards to entry into the EU—a moot point for now.

The Greeks and Turks have been at war for centuries. The Turks ruled Greece for almost 400 years from the fifteenth century until the early 1800s, under the Ottomans. It’s a period of shame that the Greeks have not forgotten and territorial conflicts arise frequently between the two countries. It is also the Greeks who have put up major resistance to the Turks entering the EU. Yet, prior to the Ottomans, it was the Greek Byzantines who ruled the Turkish coast and Constantinople.

Istanbul

If you have a bucket list and Istanbul is not on it, you should add the city to it tout de suite. It is one of the world’s major cities and one not to be missed. It is steeped in history, yet cosmopolitan at the same time. This city of 11 million does not sleep and offers visitors a wealth of sights and experiences. The best time to visit is in May or October when the crowds are small and the weather beautiful. Get a room overlooking the Bosphorus, the main waterway, and then be ready to explore. Istanbul is home to several palaces, the most famous being Topkapi Palace, home to the Ottoman rulers for 400 years before they moved to another palace, Dolmabahce, a more traditional European-style palace.

Istanbul is also famous for its mosques, which anyone of any faith can visit. Most famous of the mosques is the Blue Mosque or Sultan Ahmed Mosque, which is so named because of the blue tiles used throughout the building. A huge mosque, it is easily recognizable in photos by its size and its six minarets. It is one of only two mosques in Turkey with six minarets and unusual in the Muslim world since up until its construction only the Great Mosque in Mecca had six minarets. The Ottoman sultans solved this problem by adding a seventh to the mosque in Mecca.

It is located across from the Hagia Sophia, which, until the construction of the Blue Mosque, was the most venerated mosque in Istanbul despite its origins as a cathedral. Hagia Sophia is now open only for tourism and in itself is worth a visit to Istanbul. There are few places in the world that I have been to that are as captivating as the street between the two giant edifices, and not only for their symbolism. On a cool spring or fall evening the streets between are filled with vendors selling barbecued corn. The cafes are filled with music and one in particular is home to an exhibit of Sufi dancing. (Sufism is the mystical branch of Islam, whose adherents dance themselves into a trance-like state and are also known as the Whirling Dervishes.) The muezzin calls the faithful to prayer five times a day and the sound emanating from the mosque bounces off the giant dome of Saint Sophia. All the while, the sun is setting in the background over the Bosphorus.

The area is called Sultanahmet and is the oldest part of the city. There is an outstanding Four Seasons Hotel located in the neighborhood in a building that was formerly a prison. Let me assure you, no vestiges of the prison remain. The hotel has a terrace bar, which affords some of the best sights and sounds the neighborhood has to offer. Its web site is at www.fourseasons.com/istanbul/.

I have visited Istanbul a half dozen times over the years, and while this particular Four Seasons is one of the best hotels in the city, it has a lot of competition from the likes of the Ciragan Palace Kempinksi (www.kempinski.com/en/istanbul/Pages/Welcome.aspx), which is located on the eastern shore of the Bosphorus and boasts a magnificent view as well as spectacular Turkish baths.

There are hotels to meet every budgetary requirement and one in particular, Angels Home Hotel in Sultanahmet, offers good accommodations for the price and rooms with a view and an owner with an affinity for 1950s era Chevys, which he sometimes uses for airport runs.

Istanbul is a relatively safe city and one that is easily walkable—bring very comfortable shoes. I have observed that it is not a great city for women, especially European women, to walk unaccompanied. You will be approached by all manner of individuals. Of course, every nonlocal is approached by sellers of rugs who will invite you for a cup of tea or coffee and proceed to sell you overpriced rugs. It’s best to say no firmly and walk away regardless of the number of attempts that will be made for your attention. It’s not dissimilar to many other cities in the Orient in that respect.

Istanbul is a shopper’s paradise with bargains to be had for gold, glazed tiles, silver, rugs, leatherwear, and spices. But, be prepared to bargain and walk away. The city has two main bazaars, the Grand Bazaar and the Egyptian Bazaar. Both are overpriced tourist traps so if you want to get a good price—and you can—take a local with you. The Grand Bazaar is a massive complex with thousands of shops, not stalls, located in a maze-like structure. It is something out of antiquity with nonstop haggling and every imaginable item for sale. After a while, every store might start to look the same—for good reason. On a given aisle there might be two dozen shops selling gold jewelry followed by another dozen selling silver. The Egyptian Bazaar, or Spice Market, is much less overwhelming in size but makes up for it with louder hawkers advertising Turkish Delight, a confectionary based on a gel of starch and sugar with a myriad of additives like dates or pistachios. The hawkers will try to get your attention by calling the product “Turkish Viagra.” The Spice Market does have some of the best fruits, vegetables, and nuts in town, each piled high and extremely fresh and cheap. As for knickknacks, much of what is sold is unfortunately not even Turkish anymore as I found out by wandering in the back streets of the bazaar and noting the overwhelming number of empty boxes stamped “Made in China.”

For more high-end shopping, Istanbul offers several large malls in its suburbs. But, within the city there is an area where the masses congregate: Istiklal Caddesi and Taksim Square. You can reach it by taxi or public transportation via the subway and a funicular. Taksim is great for shopping, dining, and people watching. But you will pay Western prices. At the end of Istiklal Caddesi, you can catch public performances of the Sufi dance at the Galata Mevlevi Monastery-Mevlevihane, something not to be missed. Be sure to check the schedule to see if it is open. There are other locations where you can watch performances, as well.

There are things you should be aware of when you visit Istanbul. The cab drivers are good, for the most part, but you will run across more than one who is crooked. Be sure that the meter is not running until you are in the car and see the driver turn it on. Public transport is excellent and very inexpensive, as are the taxis. Women should always carry a shawl or something to cover their heads and shoulders if a mosque visit is planned. You will be surprised at the diversity in appearance of the local populous. Turks come in all shapes and colors. Blonde and brown hair is as common as black hair. Blue eyes, green eyes—there is no one look. Turkish women are very liberated and miniskirts are not uncommon. However, I have noticed on recent trips that more women are wearing head (not face) coverings. This is a relatively new development and one that was frowned upon by previous governments. However, the current government, while probusiness and pro-West, does have a more religious bent. It is a new phase for Turkey and one that may signal a turning point for this once staunchly secular country.

Investing in Turkey

The Istanbul Stock Exchange has been around for about 25 years in its current form. But the first Turkish stock exchange was actually operating in the nineteenth century in the Ottoman court. The modern version is home to more than 320 companies, about two dozen of which can be traded on U.S. exchanges as American Depositary Receipts on the over-the-counter (OTC) exchange and the New York Stock Exchange. A list of these companies can be found on this site, which lists them by symbol and industry: www.site-by-site.com/adr/europe/adr_trk.htm.

A far easier way to trade Turkish stocks is to use a closed-end fund like the Turkish Fund, which has been around since 1989 (see Table 7.1). However, if you are going to use this route, then the rules of emerging market trading apply—wait for a crash and then buy and never buy at a discount of less than 25 percent. Keep in mind, when investing in foreign stocks that they trade during hours when most stateside investors are still sleeping. What happens overnight in a place like Turkey can have consequences, good and bad, on the following day in New York where the Turkish Fund (NYSE:TKF) trades. Since inception, the fund has returned an average of about 7.3 percent per year. That’s quite unimpressive for an emerging market. That is why one needs to wait for opportunities. For example, during 2010, the fund returned more than 42 percent. Holdings range from cement companies to banks and breweries. I have visited the Efes Brewery and sampled the wares and can understand its strong presence in the fund’s holdings!

Table 7.1 TKF Holdings

Source: Morgan Stanley (fund manager) www.morganstanley.com/msim/portal/site/US/template.PAGE/?msimPageTitle=productdetail_us_fp_ii&u=86bb14f4dc87daf33d3afb1051a9e009&fund=1072.

Historically, very good gains have been made in Turkish stocks during periods of political unrest. While not in the same category as Thailand, Turkey does have a reputation for instability when it comes to politics. One of the main reasons for this is the struggle between those with a religious agenda and those with a secular one. Throw in a very active military sworn to protect Turkey’s secular constitution and the possibility for volatility exists.

Turkey, like many other emerging markets, has a massive black market for goods and services. Smuggling is a popular profession in a country that borders so many that are faced with internal restrictions and lack of adequate supply chains. Turkey, because of its strategic location, is also a key player in the energy business—not from a production point of view, but rather as a location for major pipelines. Many of the countries around Turkey, especially Iran and Iraq, are major energy producers in the world.

Internally, more than 30 percent of the population is dependent on agriculture. Turkey is a regional breadbasket and the country has vast arable land. The country still faces major unemployment problems, as do most countries in Europe. More than 12 percent of the population is regarded as unemployed. This would be less of an issue were it not for the fact that the economy grew by more than 8 percent in 2010 and was on track for similar gains in 2011. With that kind of growth, job creation should be significant. It’s not. Part of the problem is that Turkey’s informal market leads to skewed statistics. Those who work for cash, and there are many hundreds of thousands who do, can at the same time bleed the government for benefits.

One of Turkey’s greatest weaknesses of the past has been poor fiscal management. Tax collection is nearly impossible in a country where tax evasion is a pastime, something Turkey and Greece have in common. The government is always strapped for cash and this has led to massive deficit issues in the past and significant devaluation of its currency, the lira, to make up for its debtor status. The current government headed by Prime Minister Recep Erdogan has been in power since 2003 and is entering its third term. Under Erdogan, Turkey has deregulated the economy, privatized many state enterprises, and attracted foreign investment through a climate of economic certainty. The result has been 26 straight quarters of growth through 2011; foreign reserves of US$90 billion versus just over $20 billion in 1992; inflation of just under 6 percent, down from 40 percent a few years ago; and debt to GDP of less than 40 percent compared with 74 percent in 2002. Erdogan is a religious man who embraces his faith publicly, a rarity in Turkish politics. Yet, despite his constant efforts to push Turkey from its secular position and his friction with the military, he continues to receive strong popular support for his economic policies and his handling of Turkey’s other problem.

The other problem is Turkey’s constant struggle against the Kurdistan Workers’ Party (PKK), a group that claims to represent the displaced Kurdish population. The Kurds have been seeking a separate state in what they consider their ancestral homeland in southeast Turkey and northern Iraq. They speak a different language, follow different customs, and have been involved in numerous attacks on military and civilian targets. In the past 25 years the conflict has resulted in more than 40,000 deaths, mainly on the Kurdish side. Erdogan has made strides (one of the requirements for entering the EU) in recognizing the Kurds through actions such as restoring Kurdish names to several towns, allowing Kurds to use their language in the local political arena, and trying to maintain good relations between the two ethnic groups. But, as recently as late 2011, Turkish planes bombarded Kurdish rebel strongholds in northern Iraq after insurgencies into Turkey by the PKK. This situation, while better than in the past, is still quite tenuous and could damage the country and presidency were it to escalate.

Local investment in Turkey should be restricted to Istanbul and the Turkish coast. These are the areas with greatest development potential for tourism, a huge money earner for Turkey. Real estate in Istanbul is not cheap unless you want to risk buying an apartment or house in the suburbs. Prices are high in comparison to other emerging markets and construction is not always of the best quality. However, the city continues to grow and tourism continues to increase. Real estate values have held up well throughout the ups and downs of the economy. Turkey has a fairly good-sized middle class, a rarity in the region. It does have its super rich oligarchs and its poor country peasants, but a good chunk of the population in Istanbul and in Ankara (the capital) enjoy a lifestyle comparable to that of countries that are on the verge of first-world status. The annual per capita income for Turks is more than $13,000, and using purchasing power metrics that equates to about $16,000, meaning that $13,000 in Turkey buys about $16,000 worth of goods and services in the United States.

Turkey is solidly a Tier 1 emerging market. This means that there is very little likelihood of it turning back economically. It has an established market system, good infrastructure, an established political system, and a population that is used to being relatively independent. While its secular status has been challenged in recent years, there is no indication that Turkey will not adhere to democratic principals regardless of who is in power. It is a country often overlooked by investors, yet it offers some of the best visibility in the region.

Strengths

Turkey boasts a secular democracy. It has strong military and economic ties to the United States and Europe. It occupies a strategic location in a very unstable region and has a strong and working capitalistic economic system. There is adequate transparency. It has a cosmopolitan population in major cities with a taste for Western consumption trends. Turkey enjoys a stable, popular government and strong economic growth and better-than-average fiscal discipline (currently). It is also a major tourist destination.

Weaknesses

Turkey’s large black market inhibits adoption of a strong fiscal policy. It has lax tax collection and an overly large agrarian population that is not well educated or sophisticated. It has illiquid markets that are prone to volatility.

Opportunities

Turkey can show the rest of the Islamic world that success is achievable without strongman dictators or dependence on natural resources. It serves as a model for cooperation across religious and political boundaries. Tourism can be developed in the country’s interior regions. It has the potential to become a first-world country through greater access to European markets and strengthening trade ties with the former Soviet bloc. Turkey is a resource hub with access to the Black Sea and the Mediterranean Sea.

Threats

There exists continued conflict with the Kurdish population. Turkey’s current government is shifting to a more religious bent. The collapse of the European Union would impact Turkey negatively. There exists the threat of conflict with Greece over territorial rights, especially Cyprus. The lack of a strong tax collection system could force more government indebtedness. The strong military could oppose the current government attempt at moving to the right of center. Crises in other emerging markets could affect the country’s efforts to attract Western and Eastern capital. When emerging markets get hit, Turkey is always affected negatively because of its past inability to deal with economic crises. If that happened today, Turkey would be a “strong buy.”