Traveling to a country straddling the border between emerging and developed markets
There are two bridges spanning the Bosphorus Strait in Istanbul. It is no ordinary trip across, particularly on the more central Bosphorus Bridge. Tankers ply the notoriously turbulent waters below; to the east and west the skyline is pierced by sleek skyscrapers and the grand mosques and their ancient minarets. And you're not just crossing a mere bluish-black waterway; you're literally stepping between Europe and Asia. Aside from being a remarkable boast for a cocktail party - 'I just walked from Europe to Asia' - the journey is a metaphor for the city and country.
Turkey is both a physical and cultural bridge between Europe and the Islamic world of the Middle East or, more broadly, Asia and the West. It is a Muslim country with an emerging economy bordering the economically depressed and volatile Middle East, and it is subject to frequent bouts of instability, the latest being the collapse of the coalition government which was sparked by the prime minister's ill health. Then there is the other Turkey: the darling of the IMF, home to an unmistakably secular Islamic society hoping to join the EU within the next decade, powered by industry and a stock market that is the fifth most active emerging market in terms of value of stock trading.
The macro picture
Turkcell, Turkey's largest mobile telecoms operator and the only stock trading on both the Istanbul Stock Exchange (ISE) and the NYSE through its ADR, embodies much of the country's complexity. Like other Turkish companies, it must contend with its own image and the often contradictory perception of the country that persists among foreign investors. Koray Ozturkler, head of investor relations, focuses on both international and local investors. 'We try to put a lot of emphasis on the Turkish macro environment as well as the Turkcell story, since we are impacted significantly by macro developments,' he remarks.
For foreign investors, especially those unfamiliar with the Turkish market, the extra hand-holding is unavoidable since 9/11. It's a consistent refrain: great potential but, as one major institutional investor puts it, 'quite scary right now.'
Richard Jandrain, CIO of equity securities at Banc One Investment Advisors, sums it up this way: 'Valuations look attractive now, but politics is still a concern, so there's a big risk factor. The unstable situation is partially factored into prices, but no-one knows the outcome. Last year one of our assistant fund managers went over and the conclusion was it's just too early to invest.'
Whether or not foreign investors have fled the country in response to the latest political instability is debatable. Cenk Goksan, director of investor relations and strategic planning at Akbank, the country's largest bank, says many had already abandoned Turkey in 2001 when the country devalued its currency.
'Before the current political events, investors were undersubscribed to Turkish stocks. Foreign investors who went out of the market went out at last year's devaluation. So with regard to the political issue, I'm not aware if you can determine if they've lost interest,' says Goksan.
Talk of fresh US strikes against Iraq has deepened investor concerns. Taken together with the political situation, the macro picture isn't pretty. But according to those familiar with the situation on the ground, the perspective of outsiders is often out of touch with the reality of events and the way things work in an emerging market.
'Investors are temperamental, so you need to be very open and extensive,' says Tuncay Onbilgin, investor relations manager at Tupras, Turkey's largest oil refiner. 'Terrorism is not an issue, as we have mostly settled with the Kurds. And it was never a big issue. But it's hard to convince investors that the situation is stable. The market goes up and down 5 percent - it's hard to describe that away for investors. Our market goes down and up, but we're used to it; we know we'll still have a government. But investors want to know exactly what will happen this year and next.'
The gambling populace
Still, local investors as well as foreign ones are affected by Turkey's market volatility. Turks, it turns out, love to invest. Individual investors are not only active, they're a driving force behind the wild swings in share prices that can occur. 'The Turkish market has a big domestic following, so it tends to be more casino-like. They bid up the names they like, just like it used to be in Taiwan and Hong Kong. People like to try to make a quick buck. So the market is very volatile. It's frustrating for institutions,' says Frank Chiang, a portfolio manager for the core emerging markets portfolios at Montgomery Asset Management.
In February 2002, two professional soccer teams debuted on the ISE. Despite the country's obsession with the sport, both IPOs fared poorly. The IPOs prove companies can still raise money in Turkey, but small investors trading on word of mouth lost money.
'Individuals like to listen to everyone. They don't go to mutual funds or analysts. They talk with one another. If they hear a share is good, they may buy it. Since there is no real technical or reliable information, people lose money. That creates fluctuation. If the information is better, there will be less volatility,' says Onbilgin.
Kagan Cevik, assistant director of research at Global Securities, the country's largest brokerage house, argues that the volatility and the participation of small investors provides the market with its liquidity. 'It is the depth of the Turkish market that makes it so attractive. Some stocks trade $100 mn per day.'
That 'depth' is enough to reverse the situation of most emerging markets, where investors often look for ADRs or GDRs as their entry point. Instead, the ordinary, locally-listed shares are liquid enough for foreign investors and in fact more liquid than the ADRs or GDRs.
Another concern present in all emerging markets is that minority shareholders get the short end of the stick when it comes to fair play. Although the rash of corporate scandals in the US has weakened the position of large western shareholder activists promoting better corporate governance, Turkey seems to be forging ahead with improvements in disclosure and transparency nonetheless.
One of the most important changes underway is the inclusion of inflation-based accounting. The Capital Markets Board of Turkey, known as the SPK, requires quarterly financial statements, but Turkish Gaap does not include inflation-based accounting, a serious problem given the fluctuation of the currency.
The SPK says it plans to make inflation-based accounting mandatory next year. In the meantime, many of the major companies are voluntarily providing the figures. Turkcell, for instance, does so as part of its US Gaap reporting filed in accordance with its US listing. Turkey's largest brewer, Anadolu Efes, and Tupras both provide semi-annual consolidated financial statements in accordance with international accounting standards. 'With respect to accounting standards, in December 2001 the banking supervisory authority asked banks to use [inflation-based] accounting on a mandatory basis,' says Goksan.
As for minority shareholder rights, the SPK has taken some steps to improve the situation. One of the chief complaints is that companies that fell afoul of listing requirements had their ISE trading halted, often for long periods of time. While it is worth noting that the regulatory framework has teeth - the SPK functions like the US Securities & Exchange Commission and recently had its authority broadened - many investors complain that they have been unable to sell their shares when they wanted to.
One solution has been to allow intermediaries to sell the shares, a process the SPK has set up with brokers. The companies are also required to continue disclosing their financial results while their trading is halted. What sort of price the shares might command in such an environment is questionable, but at least, as Global Securities' Cevik puts it, the initiative is 'fair'.
Beyond the regulatory environment, Turkish companies get high marks for their corporate governance and overall investor relations efforts. The qualifier is that most of the advances have been made by only the largest companies. On the whole, however, with the ISE and the SPK holding significant regulatory power, disclosure is good relative to other emerging markets.
'They still have work to do on their own domestic disclosure regulations,' says Chiang. 'In terms of setting up an IR effort, they may not always be transparent, but they're ready to talk to investors. Latin America and some Hong Kong companies may do a better job, but the top companies in Turkey - and there are only about 10-15 companies we look at in terms of size - are very responsive.'
In the last few years, large Turkish companies have established dedicated investor relations departments. The corporate web sites are improving, with English versions available or in the works. Turkcell's IR web site, for example, boasts the type of disclosure you'd expect from corporate leaders operating within established markets.
'We communicate with retail investors mostly through press releases and our web site, due to the large size of the retail base,' explains Ozturkler. 'On the other hand, the majority of our IR practice aimed at institutions is through direct contact and other means. We like to have the CEO, CFO and investor relations team go out at least once a year on a roadshow, and we attend conferences in Europe and the US, generally two or three times a year. In terms of transparency and disclosure, we follow NYSE and SEC rules, along with ISE and SPK rules, and we believe we have been demonstrating a quite satisfactory investor relations practice in terms of western standards. We also believe that we have one of the leading disclosure practices of emerging market companies.'
No matter how good their IR, however, Turkish companies still have to contend with the country's macroeconomic picture. How investors see that picture in the future will determine the success of any given stock. Much of the outlook may hinge on Turkey's prospects of becoming an EU member. 'The Turkish people want to align themselves with the Europeans,' Chiang states. 'That's a positive for Turkey's international standing. Of course, there are problems internally, such as more fundamentalist groups pushing for more political power,' says Chiang.
The government has taken steps to satisfy EU entrance requirements, including abolishing the death penalty. It's also established a strong record on its fiscal policy, emerging as one of the IMF's largest borrowers with over $31 bn in loans. If the country remains on track, the gulf between emerging market and developed market status will begin to disappear.
'I think we are very comparable to our western peers in terms of the size of our operations, though from a valuation perspective, we are placed at an emerging market valuation. We are the leading mobile player with 13.8 mn subscribers in a market of four players, where the mobile penetration rate is approximately 30 percent. That allows plenty of room for growth, particularly compared to developed European markets. There is a lot of potential in the country with a population of 65 mn. If Turkey does better economically, we could offer more potential than other emerging market peers, just from the perspective of the market potential and size of our operations,' says Ozturkler.
Postscript: In August, Turkey's economy minister, Kemal Dervis, architect of the IMF-backed $16 bn recovery program, resigned. Dervis has joined a pro-western coalition to take on nationalists and conservatives in new elections.
One complaint about Turkish companies is that many of the largest represent fragmented businesses held together in cross-holding relationships or holding company webs that make them difficult to understand. Efes Beverage Group was typical of this structure. At the end of 1999, the number of companies operating under the Efes umbrella was six, four of which were publicly traded.
'Our objective of creating long-term sustainable shareholder value and providing a simple and transparent structure led us to a restructuring program that was initiated in 1999. The program involved, among other measures, the merger of our four publicly listed companies in Turkey into a single entity,' says Orhun Kostem, head of investor relations.
The merger process was completed in June 2000. The companies merged under the main brewer, Erciyas Biracilik, and the name of the entity was changed to Anadolu Efes. 'The merger enabled our investors to better understand our structure and financial performance, as well as to assess the value of our brewing and bottling interests,' says Kostem.
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