Country Snapshot
Goldman Sachs Asset Management is attracted to the relatively strong macroeconomic picture in Mexico. The country saw robust GDP growth during the first half of 2012, largely driven by consumer spending, and it is projected to grow 3.6% for the year, says Stupnytska. Its central bank has also been able to ease financial conditions amid moderate inflationary pressures. Mexico also offers long-term advantages, she says. It has a relatively low external debt burden. The country enjoys improving life expectancy and education and a high urbanization rate. And the cost of starting a business is relatively low. However, the country loses some points for its political instability and its weak spending on research and development. Mexicans also have generally less access to PCs and secure Internet servers.

Stupnytska is also enthusiastic about Indonesia. "Both from a cyclical perspective and longer-term growth environment, it's a relatively solid picture there," she says. Goldman has forecast a strong 6% GDP for Indonesia in 2012, growth driven by the country's robust domestic demand, helped by the acceleration of credit. Inflationary pressures, which drove up food and energy prices last year, have also been very benign in the country this year, Stupnytska says. In the longer term, Indonesia's expanding middle class is expected to take off this decade, which will create numerous investment opportunities.

Indonesia is also benefiting from China's rising wages, since Chinese companies, including some technology companies and clothing manufacturers, are now turning to Indonesia for cheap labor, she says. Japanese auto manufacturers have also started using it as a production base.

Export-driven South Korea, meanwhile, has been hurt by slowing global growth, particularly in China. Goldman forecasts real GDP growth of 2.5% in South Korea in 2012, and Stupnytska believes the central banks will likely cut interest rates a second time this year. If there's a push for growth stimulus in China, it could increase demand for Korean exports, brightening the latter country's near-term prospects, she adds. She notes that from a structural perspective, South Korea is well placed to achieve its economic potential, ranking above most of the G7 countries on Goldman's "Growth Environment Score" metric.

Relatively weak growth has also recently plagued Turkey, which has suffered sluggish domestic demand and weak exports to the euro zone, Stupnytska says. Goldman expects Turkey to see 3% GDP growth this year, but it depends on economic conditions outside the country, she warns. She expects to see those external conditions improve in 2013, which should trigger some recovery for Turkey, but it's important to watch the developments in Europe.

Turkey has several advantages that will help its long-term growth. It has plenty of human capital. Meanwhile, mobile technology has quickly spread throughout the country. And it costs relatively little to start a business there. Its weaknesses are its political stability and underdeveloped technology. The business environment is also less friendly to innovation.

More Fund Findings
Ivka Kalus-Bystricky, who manages two funds for Portsmouth, N.H.-based Pax World Management LLC, is also optimistic about Turkey. Approximately 3% of the Pax World International Fund portfolio is invested there, out of a total 10% allocation to emerging markets. The Pax World Global Women's Equality Fund has 1.5% of its assets in Turkey.

Though Turkey has been hit hard by Europe's woes and currency troubles, the Turkish lira has held up well this year, company valuations have become more compelling, and there are a number of strong fundamentals, says Kalus-Bystricky. She notes that Turkey is well-positioned to work with both Europe and the Middle East. It has also become more democratic, its inflation rate has cooled, its labor is cheap and 30% of its population is below the age of 30. "I always look for the long-term story," she says.

A top Turkey holding is Halkbank, a small-to-midsize enterprise bank that Kalus-Bystricky expects to benefit from the country's growing middle class and economy. It trades at 1.7 times book value, higher than European banks, which trade at less than 1 times book, but she thinks it's worth it since the return on equity tops 20% (double that of many European banks), and the return on assets is 2.3 (whereas it is less than 1 for most European banks). The bank's projected long-term earnings growth is in the midteens. "With regulations in Europe to raise capital, you'd be hard-pressed to see [earnings] growth there outside single digits," she says.

Kalus-Bystricky also likes Turkish cement company Mardin Cimento Sanayii, which she says is one of the few ways to invest in the country's infrastructure. The company has no debt, enjoys lots of cash flow, and benefits from a 12% yield and a feedback loop that includes the country's rising credit, growing middle class and stepped-up foreign investments, she says.
Despite her enthusiasm for Turkey, she is keeping a watchful eye on its political risks, which she says could harm the nation's sovereign credit ratings.