When you think of “emerging markets” you probably think of places like China, Brazil and India.

These places are certainly booming. But there’s another part of the emerging world that is in full flight now – and that’s Europe.

As of September 30, the big U.S. stock market benchmark, the S&P 500, was only up 3.89% for the year. Meanwhile, stocks in the Czech Republic rose 8.19%, stocks in Poland rose 11.6%.

Even more impressive were Turkish stocks. These were up a massive 31%, as you can see from the chart above from Bloomberg.

With this kind of growth, you’d expect these markets to be pricey. Not so. Turkey, the Czech Republic, Russia and Hungary are all on price-to-earnings ratios of 10 or below. Poland is slightly more expensive. It’s trading at a price-to-earnings ratio of 11.

That makes all of these emerging European nations cheap compared to the MSCI Emerging Markets Index. As of the end of September this traded on a P/E of 14.8.

All of these nations are worth investigating further at these valuations. But for my money, Turkey is the standout prospect right now.

Turkey’s progress hasn’t gone unnoticed. Templeton Asset Management, one of the world’s most respected international funds, plans to invest an extra $250 million in Turkey on top of the $1 billion it has already invested.

A Market on the Fault Line of Europe

Turkey has had a great year so far. Its economy grew at an annual rate of 10% in the first two quarters. This put it ahead of all the other G20 nations bar China.

The country’s blistering growth is due to a combination of factors:

• Unlike its neighbor Greece, Turkey survived the European banking crisis without having to bail out any of its banks.
• Structural reforms carried out in 2001 have led to a domestic-consumption driven economy.
• Levels of government debt and private debt are low.
• It has a relatively young population. The median age in Turkey is 27 years, which puts it well below that of China (34), South Korea (36) and Russia (38).

More important, Turkey lies on the fault line between Western Europe and the Middle East. Although it has traditionally aligned itself with Europe, it has recently signed free trade agreements with Syria and Jordan. And it is conducting trade negotiations with Lebanon.

One sector that is particularly attractive in Turkey is banking. As Mobius put it recently in the Financial Times:

Turkey still remains an under-banked market by global standards. The low penetration in almost all areas means that there is immense growth potential. The sector accounts for 89% of GDP, far behind the EU average of 320 per cent. Likewise, volumes of mortgage loans at 5% of GDP (EU average: 41%) also proves the under-penetrated character of the sector.

If Turkish mortgage loan volumes come into line with European averages – and given the growth of the economy and the young population there – I expect it will, this sector could reap big rewards for investors. Not only are growth prospects good, but also Turkey’s banks are some of the most solid in the world right now.

There are a number of ways to play this situation. You could, for example, opt for an over-the-counter ADR such as Akbank (PINK:AKBTY). ADRs (American Depository Receipts) are certificates issued by an American bank and traded in the U.S. as dollar-denominated versions of foreign shares.

The problem with this approach is that over-the-counter ADRs (ADRs that are not listed on a major U.S. exchange) can be highly illiquid. This can lead to volatile price swings. Over-the-counter ADRs can also carry extra risk because they don’t have to comply with the accounting standards set out by American exchanges.

I will be looking into alternative ways to benefit from the Turkish boom in my new emerging markets research service, Alpha Hunter. Learn more about this service here.