Turkey will never compete with BRICs, says AAA-rated Brück

A high presence of financial institutions in Turkey's market and risks of spiralling inflation rates has led top performing manager Markus Brück of Metzler Asset Management to rule out the country from his European emerging market fund.

In a move which contradicts recent fervour surrounding Turkey - indeed, it was named as one of the next emerging markets to watch in the recently defined ‘Civets’ list, which is being heralded as the next BRIC - the Citywire AAA-rated manager believes the country’s very structure will impede it from reaching these heights.

‘Turkey will never become a China, Brazil, India or Russia for one main reason, the structure of the economy will not enable Turkey at any time in the future to become a "budget surplus" country,' says Brück, who runs the Metzler Eastern Europe fund. 'This means they will have to continue to manage a current account deficit with a need of foreign flows - portfolio flows as well as FDI's.’

In order to replicate the ‘surplus’ flows seen in countries like Brazil, Frankfurt-based Brück believes Turkey would need to implement a monetary policy regime that is consequently fighting against inflation. However, its Central Bank has not given any indication it will adopt such a strategy.

‘In the next monetary cycle, the Turkish Central Bank has the unique opportunity from the beginning to raise credibility and as a result to brake inflation expectation. But the challenge in Turkey is huge because the country is a heavily net importer of commodities, especially oil, which makes its inflation more volatile than in other BRIC countries.’

‘A change of the behaviour of the Central bank, such as an early tightening in the cycle would be definitely short term negative for the equity market but will pay off on the long term.’

Although he is not ruling out any future investment in the Mediterranean country, Brück has focused his attention recently on the Eastern European small & mid cap universe in countries like Estonia or Kazakhstan.

‘When you have an economy like Estonia that contracted by 15% during the crisis, when it is stabilising it can then grow,' says Brück. ‘Many companies were very quick to change their spending behaviour during the crisis and went through massive restructuring and are now back to really attractive levels.’

The ferry operator Tallink is his principal holding in the small Eastern European state, while his investment in Kazakhstan centres around cement producer Steppe Cement as the government is planning major infrastructure spending for public projects over the next few years.

The main sectors he is betting on over the next few months are the energy industries, especially the ‘deep value’ Russian oil and gas sectors.

Over the last five years the Metzler Eastern Europe fund has posted returns of 46% while its benchmark, Nomura Central & East European, returned 28%.