NEW YORK (TheStreet) -- When the Arab Spring countries began falling into chaos, hopes for democratic rule and economic growth in the Middle East and North Africa were dashed and Western investors put further plans on hold and started to flee the region. Investors who include Turkey in such a pullback are misreading the situation and may well be missing out on a text-book emerging market opportunity.
A Singular Secular Muslim Nation-State
The Republic of Turkey has long been in the shadow of the oil-producing powerhouses of the Persian Gulf. This former center of the Ottoman Empire is where Europe and Asia meet geographically, and the Turkish have historically been adept at straddling these two continents culturally which has made the country a worldwide hub of trade and commerce for centuries.
Nearly 100% Muslim, the country is generally considered the only functioning Muslim democracy in the Middle-East, with a secular nation-state, pluralistic separation of church and state and qualifying attributes such as constitutional and representative government. Turkey has had the longest and closest contact with the West of all the Muslim countries dating back almost to the beginnings of the Ottoman Empire.
The country has become a manufacturing and exporting powerhouse with the 6th largest economy in Europe, 19th globally, and it is set to become the fastest-growing member of the OECD. In recent years well-known economists such as Jim O'Neill, retired chairman of Goldman Sachs Asset Management (GS) - Get Goldman Sachs Group, Inc. (GS) Report, have predicted that Turkey is one country in particular that could follow in the BRICS' footsteps and "positively surprise people," becoming a top contributor to global GDP growth and be in the top ten countries in the world in the next 20 years.
Youthful Population Poised for Growth
Fast-growing, young, educated populations and exploding middle-classes are target characteristics foremost in the minds of emerging market investors. Turkey presents a compelling case with a population of nearly 77 million, over half of whom are 30 years or younger. It has a larger youth population than any of its European neighbors, which is primed for a rise in status, occupation, and standard of living. This youthful educated workforce and the booming middle class do not carry the healthcare and retirement burdens associated with a significant elderly population and put it in much better shape than many of its European or Middle-Eastern counterparts.
Turkey has proved to be resilient in the face of global economic turmoil. While developed economies were in free-fall during the recent economic crisis, Turkey quietly increased its GDP more than threefold from $231 billion to a staggering $820 billion between 2002 and 2013.
Following the Nationalists' victory over the Allies in the Turkish War of Independence in 1923, the former Turkish army officer Mustafa Kemal Atatürk founded the Republic of Turkey, becoming its first President. His surname, Atatürk (meaning, "Father of the Turks"), was granted to him and forbidden to any other person by the Turkish parliament in 1934. A great believer in the sovereignty of the people, he embarked upon a program of political, economic and cultural reforms, abolishing the caliphate of the former Ottoman Empire and transforming it into a modern, democratic, independent and secular nation-state. Notably separating Turkey from its Muslim contemporaries, he decisively advocated the pluralistic separation of church and state, equality for women, and new schools with free, compulsory education.
New Leader for a New Millennium
Fast-forward to 2001 when Turkey's economy crashed after political corruption led to two decades of massive budget deficits mostly financed by the issuance of high-yield junk bonds to foreigners. In 2002 an ambitious former mayor of Istanbul and semi-professional soccer player, Recep Tayyip Erdogan, emerged to become Prime Minister. Since then, he is credited with bringing impressive economic growth and political stability to the country. He has laid out his vision for Turkey to achieve top ten global status within a decade, targeting GDP over $2 trillion and per capita income of $25,000 as the "China of Europe" -- becoming the manufacturing base for the continent along with aspirations to join the European Union.
The Best House in a Bad Neighborhood
In 2010, a series of anti-government protests, riots and civil wars now known as the Arab Spring, spread across the Middle East and North Africa in expressions of deep-seated resentment of ageing Arab dictatorships. At the time, Western expectations from the Arab Spring were high for the region, with hopes for new democracies leading to economic growth and a region of new investment opportunities.
By January 2015, the Arab Spring had essentially imploded, with rulers ousted in Tunisia, Egypt, Libya, and Yemen, violent crackdowns in Algeria, Bahrain, Jordan, Kuwait, Morocco, and Sudan, and large-scale ongoing armed conflicts in Iraq, Syria, and Yemen. Most worrying was the emergence of the terrorist organization, Islamic State of Iraq and the Levant (ISIL) which has taken control of large territories in Iraq and Syria while producing now well-known social media propaganda including beheadings of soldiers, journalists and aid workers, and the destruction of key historic cultural heritage sites.
Prior to 2011, there were between 15-to-20 management companies active in the Turkish private equity market and Turkish private equity funds were seeing annual returns of 30% in U.S. dollars terms. Investors responded to the resultant Arab Spring implosion chaos by putting investments on hold, withdrawing funds and fleeing the region. While Turkey was not part of the Arab Spring, it was caught in this downdraft by geographic association and saw an 18% drop in foreign investment in 2012, followed in 2013 by an additional 6% decline. Most of the larger overseas players such as Advent, Bridgepoint and Carlyle (CG) - Get Carlyle Group L.P. Report largely scaled back their Turkish operations leaving roughly half the number of participants, the largest being local players such as Turkven and Actera.
Self-Rule Leadership Vacuum
To associate Turkey with the chaos of its neighbors is to misunderstand the underlying dynamics that underpin the regional turmoil. The wave of Arab Spring demonstrations ultimately triggered the sudden implosion of long-term autocratic rule in several countries. In doing so, it created a vacuum void of strong, democratic-oriented leadership necessary to govern large, expectant young populations with massively unmet needs, complex underlying religious divisions and no cultural tradition of democratic self-rule to draw upon.
Turkey's Democracy Quietly Gains...
Turkey, on the other hand, has demonstrated a fledgling, but functioning democratic infrastructure and citizen buy-in as it has continued to move forward on its journey to democratic rule. Most notably, Erdogan was re-elected Prime Minister in two general elections, albeit while deploying heavy-handed political tactics, and most recently was elected the 12th President of Turkey in August 2014 -- all in elections that have generally been recognized by the international community as free and fair.
...But Not Without Growing Pains
Nevertheless, Turkey is not without its own issues. The country has undeniably experienced internal turmoil in recent years such as the Gezi Park & Taksim Square protests against the government in 2013 as well as other serious problems such as human rights issues and its battle with organized crime.
At their core, Turkey's civil protests and governmental responses may be more appropriately viewed as democratic teething pains of a large, young population that is learning to exercise its voice and express itself in self-rule. At the same time, President Erdogan's government appears to be having difficulty adjusting to these vocal expressions of the will of the people. This dynamic, combined with opposition parties that are neither mature enough nor sufficiently organized to win general elections and assume power, can best be described as symptoms of democracy growing pains.
No Smooth Ride
Despite his recent electoral success, Erdogan continues to take steps that raise eyebrows both at home and abroad. Increasing media and internet censorship, muzzling of social media and strong-arm tactics influencing and controlling the judiciary appear to be a drift towards more authoritarian rule. Moves towards building a more Islam-focused education system to realize his stated goal of raising "pious generations" are meeting public resistance. Public demonstrations supporting the secularism of the country's educational system signal plenty of bumpy political debate ahead. In the short-term, these are likely to be more like shouting-matches than conversations.
Blood in the Streets
Turkey now presents a particularly interesting opportunity for emerging market investment at attractive values that have been impacted by association with the regional turmoil. There are no further general elections scheduled until at least 2018 after the next Parliamentary election on June 7th and people on the ground are expecting a period of relative domestic calm which will be positive for the currency.
Private equity fund managers today are finding Turkish companies that are growing at 30%-t0-40% and, despite massive Turkish currency depreciation, are seeing returns of up to 20% in U.S. dollar terms from their funds. Minimum investment in these funds is generally $5 million but $1 million minimums are not unusual, depending on the size of the fund. 2014 saw a slight increase in foreign investment inflow of 1% from 2013 at $12.5 billion, which may indicate the beginning of a turnaround in foreign investor interest in Turkish deal flow.
Financier Nathan Mayer Rothschild famously said: "The time to buy is when there's blood in the streets," describing the best time to invest as being contrarian to consensus thinking.
Much of the region today is aflame in sectarian violence and power struggles but Turkey is a fledgling, secular Muslim democracy, and this is its most distinguishing characteristic from its regional neighbors. The blood is in the streets of its neighbors, not in Turkey.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.