The facts certainly support the argument for investing in Turkey: the economy is improving, with continuous growth and slowing inflation; the vast and youthful population makes for a favourable demographic; and there are ongoing negotiations on the prospect of EU membership.

At the same time, the Turkish market remains the most volatile in Europe. Not only are swings in the global arena making the domestic market suffer more than any other, but political instability has been an additional cause for concern.

“The volatility is extremely high, as is currency risk,” says Mikko Mursula, head of listed securities at the €25.2bn Finnish pension insurance company Ilmarinen.

Turkey’s huge volatility and the accompanying risk are certainly matters that fund managers are aware of; even among some of the most enthusiastic supporters of Turkish investment: “You should never underestimate a volatile market and that’s something any investor needs to be aware of. Turkey will always be punished when global markets suffer,” says Raoul Konnos, director for emerging markets at Glitnir and manager at FIM Funds, which was the first Finnish asset manager to invest in Turkey.

East Capital, the Swedish boutique that invests exclusively in eastern Europe, is of a similar opinion.

“The Turkish market tends to overreact, both when markets go up and down,” says Marcus Svedberg, East Capital’s chief economist.

He believes certain factors, like its high inflation and considerable energy dependency, make Turkey more vulnerable than its eastern European neighbours. Still, he does not believe the volatility of the Turkish market is deterring any investors.

“But it certainly leads to great capital flows – both in and out of the country,” says Mr Svedberg.

Regardless of the risks, fund managers are still optimistic about the investment case and believe that the Turkish market is well suited for institutional investors.

“Our view is that institutional investors really should consider Turkey as an investment target. It’s a big economy with a large and young population. The country has lots of potential and the quality of Turkish companies is relatively high,” says Ari Metso, chief executive officer at Taaleritehdas East Asset Management.

Some, like East Capital, are convinced that being a long-term investor is crucial for investing in the country.

“Our message is that you need to be a long-term investor, since there will be great movements in the market. You need to be very cautious if you aren’t there for the long term. While that may be the case for investments in most emerging markets, it’s especially important when it comes to Turkey,” says Mr Svedberg.

However, the returns for 2008 have so far not been anywhere near as impressive as last year, when the Turkish market went up by about 70 per cent. Apart from a jump in July, 2008 has been nothing but bad news for the Turkish stock market.

“There’s increasing inflationary pressure and the high interest rates in Turkey make the country vulnerable to global turmoil. This was further exacerbated by domestic political concerns,” says Mr Svedberg.

He admits that the performance of East Capital’s Turkey fund was the worst of all its funds during the first half of this year.

Politics is another factor to consider when investing in the country. Interestingly, while it did not previously have much impact on the financial markets, recent events have turned things around. This year’s political instability, which culminated in attempts to get the ruling Justice and Development party (AKP) banned in the constitutional court, did spur significant reaction from the market. However, the market was not affected negatively to any greater extent during last year’s turbulence when the military tried to gain more power.

Despite its mildly Islamist profile, AKP’s rule has proven good for foreign investors. Not only has the party brought political stability, but it has also initiated reforms and started EU membership negotiations.

“Turkey barely attracted any foreign direct investments before 2000. It wasn’t until the EU membership came on the agenda that anyone actually dared investing,” says Mr Konnos at Glitnir.

In fact, Taaleritehdas’s Mr Metso believes that the Turkish market’s reputation is much worse than the reality and is particularly impressed with the country’s senior management.

“When comparing some of the top management people in Turkey to some public listed Finnish companies, Turkish management is a lot better. The very high quality of people within the Turkish business sector is not a well-known fact,” he says.

Nevertheless, most Nordic pension funds are lacking a specific strategy for Turkey and are not investing in any specific Turkey funds. Finnish Ilmarinen’s strategy is probably representative of the majority of Nordic investors: the firm has some exposure to the Turkish market through its two global emerging market mandates, but is not investing in any country fund and has no direct Turkish equities in its portfolio.

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