Election Lifts Market in Turkey
Conrad De Aenlle, New York Times, November 17, 2002 - An electoral landslide by a party known for its Islamist roots is an unlikely magnet for investment, but the triumph of the Justice and Development Party in Turkey has sent the country's stock market soaring.

Turkish shares rose by about 50 percent in the weeks immediately before and since national elections earlier this month as it became apparent that the Justice and Development Party would have a large parliamentary majority. That is a rare event in Turkey, and the stability it heralded pleased investors.

"It removes a political cloud and marks a pivotal shift for Turkey," said Ahmad Zuaiter, who manages the Turkish Investment Fund, a closed-end fund run by Morgan Stanley and traded on the New York Stock Exchange.

The Justice and Development Party has pledged to use its mandate to seek admission to the European Union as soon as possible and to pursue economic reforms sought by foreign creditors like the International Monetary Fund. The I.M.F. wants Turkey to cut government spending, revamp its banking industry and reduce farm subsidies.

Analysts who follow Turkish stocks for Merrill Lynch said the outlook for reform had brightened. In a report recommending an overweight position for Turkey in global portfolios, they argued that "the sheer scale of Justice and Development's majority bodes well for political stability and implementation of reforms" and that the party's "landslide does not represent a victory for political Islam."

Mr. Zuaiter is more circumspect, saying that Justice and Development "has a lot more to prove because it has a limited track record." "It has also sent mixed signals in the last couple of months," he said.

Nevertheless, he described himself as "cautiously optimistic from a foreign-investment standpoint." The Turkish stock market is extremely volatile, in large part because of large and sudden changes in inflation expectations and interest rates. It is common for yields on short-term debt to fluctuate by several percentage points in the course of a few weeks or even days. A sharp and swift rise in rates can make debt a more attractive investment option and spark an exodus from the stock market. When rates fall, as they have in the last couple of months, a flood of equity investment typically follows.

The Turkish Investment Fund is a convenient way for Americans to get broad, undiluted exposure to Turkey, although other funds have sizable holdings. T. Rowe Price Emerging Europe and Mediterranean, an open-end mutual fund, has 17 percent of its assets in Turkey. The closed-end Templeton Emerging Markets Fund has 5 percent there.

Mr. Zuaiter's fund rose 3.2 percent in the last 12 months, a period in which the Standard & Poor's 500 index lost more than one-fifth of its value. The fund's largest holdings include Akcansa Cimenti, which has activities in construction and building materials; the bank Akbank; Trakya Cam, a glass manufacturer; Koc Holdings, a conglomerate with interests in automobiles and consumer goods; and Turkcell, which provides two-thirds of Turkish wireless-phone service.

While most telecommunications stocks have performed poorly, Turkcell, traded on the New York Stock Exchange (it is the only Turkish stock with such a listing) was up 13.3 percent in the last 12 months.

The company "is very well managed," Mr. Zuaiter said, "with foreign strategic partners like Sonera," a Finnish telecommunications concern that controls nearly half the shares.

Turkcell "invested a significant amount of money early on, establishing dominance in the market," he said. "It has been pivotal in expanding mobile penetration," in part by luring away customers from Turkey's creaky state telephone system.

UBS Warburg is less enthusiastic and has a "hold" rating on Turkcell. Noting that its other major shareholder, Cukurova Group, controlled a bank that recently failed, Warburg's analysts say that the government may press Cukurova to sell its stake, depressing the stock.

Mr. Zuaiter said he owned Koc Holdings because it was "an entrenched brand name in Turkey and provides exposure to a number of facets of the economy." The Koc family owns a controlling interest in Migros, the country's largest retailer. Migros, which has its own listing, is the largest Turkish holding of the T. Rowe Price regional fund.

The Akbank investment is a bet on growth in Turkey's underdeveloped banking sector. Mr. Zuaiter said he liked the cement and glass companies "because we think there will be significant growth in construction activity, not just in Turkey but in the surrounding region."

He was referring especially to Iraq, which accounted for 25 percent of Turkish trade before the Persian Gulf war. If there is another war, and if Iraq is defeated quickly, companies like Akcansa and Trakya would have a great deal to gain, he said. Iraq will have to be rebuilt, Mr. Zuaiter said, and he figures they will be among the Turkish companies winning work contracts.

As a member of the North Atlantic Treaty Organization that borders Iraq, Turkey appears to have much at stake in a war.

"If it's a short and contained conflict, there is going to be a short-term hit to risk perceptions, and on the fiscal side too because tourism revenues will be down," Mr. Zuaiter said. "Long term, Turkey is well positioned to be a bridge for Western investors who want to get into Iraq."

But he cautioned prospective investors that "in a protracted war, there is a lot to lose."