Emerging Markets

The Turkey Coup And Rising Geopolitical Worries - Commentaries

Tom Burroughes Group Editor London 18 July 2016

The Turkey Coup And Rising Geopolitical Worries - Commentaries

The failed coup against the Turkish president by the armed forces have, along with the horrors of Nice and events such as shootings of police in the US, added to deep unease in many countries. Here are some thoughts from a variety of commentators.

If there is one thing wealth managers and their clients can agree on it is that recent events prove how fast geopolitical storms can erupt. At the end of last week the world was confronted with the mass killings in Nice, France. Over the weekend, Turkey looked as if the government of President Erdogan could fall to a military coup. As of the time of writing, he has survived and there are now reports of planned crackdowns on the military, and alarms about whether Erdogan could centralise his power further, causing problems for the EU over matters such as refugees. And to round off a nerve-wracking period, shootings of police officers in the US highlighted tensions in US society as the world’s largest economy gears up for Presidential elections in November. 

The change in perceptions of Turkey have been rapid. Only a few years ago, your correspondent travelled to Istanbul to attend an investment seminar and was struck by the seeming dynamism of the country and its potential in wealth management. (See that article here.) More recently, the MSCI Turkey Index of equities in that country has actually had a decent run since January; as of Friday (just before to the coup) the index, measured in dollars, was showing total returns of more than 22 per cent, although in the last three months, the index is down more than 5 per cent. The economic soothsayers at the Paris-headquartered OECD said Turkish economic growth should come out at 4 per cent for 2016. “Turkey’s economy has proven remarkably resilient in the face of a challenging global economic context. However, further action can be taken to raise productivity and advance the shift to a more balanced, sustainable and stronger growth path that will boost living standards for the entire population,” the organisation said. However, the Istanbul 100 Index fell more than 4 per cent yesterday. (For other examples of articles about Turkey and its issues, see here and here.)

Turkey’s problems will be of broad concern because it is frequently seen as a pivotal power; it is a member of NATO and a gateway to some degree to the Middle East. Its long border with Syria, and its conflicts with Kurdish separatists, make Turkey a country to watch. Turkey also historically has been at odds with Russia, and one wonders how events of the weekend are viewed by President Vladimir Putin. Turkey also recently moved to repair relations with Israel. So across a number of fronts, Turkey, a nation of around 75 million people, matters.

Here are comments from bank analysts and geopolitical commentators on the Turkey situation and other issues. We welcome further comments and they can be sent to tom.burroughes@wealthbriefing.com

Citigroup: Tina Fordham, chief global political analyst
The failed military coup attempt in Turkey comes fast on the heels of a ‎series of events that have rattled nerves. Days before, the Bastille Day attack in Nice killed 84 people. Less than three weeks before, the UK's vote to leave the European Union marked watershed for developed market political risk and raises the spectre of an existential challenge for the European Union. At the same time, polling gains in key US swing states have prompted us to raise the probability of a Trump presidency to 35 per cent, with the potential to go higher as Hillary Clinton's campaign remains lacklustre. Taken together, these developments ‎point to a marked increase in political risks in systemically-significant countries.

Lombard Odier Investment Managers: Salman Ahmed, chief investment strategist
Given the sharp rise in political instability in Turkey and the country’s extremely vulnerable and worsening external profile, we think Turkish assets are likely to remain under pressure going forward as underlying structural stability is reassessed. That said, the rather swift resolution, in terms reinstatement of law and order, and resulting strengthening of Erodgan in the post failed coup environment may help reduce the extreme tail risk scenario of an outright civil war. 

On the basis of our fundamentals-based approach, Turkey is consistently identified as a vulnerable country. It has weak fundamentals across a range of credit quality metrics, which means we give a lower weighting to Turkey compared to the market cap benchmarks. Credit rating downgrade risks have increased significantly in light of the domestic political situation and in the medium term, the security situation will likely impact tourism revenues, which will have implications for Turkey’s GDP growth and current account profile, which is low/vulnerable compared to its emerging market peers.

IHS Jane’s: Reed Foster, Middle East
The military has seen its influence significantly curtailed under the AKP, and in particular under the Prime Ministerial and Presidential appointments of Recep Tayyip Erdogan. The coup itself was likely a response by a faction within the military who sought to cease the erosion of military power within the state that has accelerated in recent years and to re-establish the secular principals upon which the modern Turkish state was founded.

The failure of the coup can be attributed largely to lack of unity within the armed forces supporting regime change, particularly at a time when the Turkish state is beset with increasing internal and external security threats ranging from PKK separatists to Islamic State militants. Even as reports surface of up to 6,000 service personnel being arrested in relation to the plot, they constitute only a fraction of the Turkish armed forces' 400,000 active personnel.

There is unlikely to be further coup attempts by the military in the near-term, as the military's power and political influence will be significantly tarnished by the latest incident.  Unlike previous investigations and operations relating to “Ergenekon” and “Sledgehammer” there is unlikely to be significant public outcry against the conviction of key coup plotters. Vacancies created by purging officers who have voiced opposition to AKP policies filled by those loyal to the government.

The Turkish military has long seen itself as the guarantor of the secular Turkish state, historically intervening to remove civil governments that it has collectively deemed to threaten the integrity or the security of the state. Two previous coup plots since 2000 referred to widely as “Ergenekon” and 'Sledgehammer' failed in the planning stages, while Friday's attempt far exceeded both in both its scope and scale. 

Julius Baer: Markus Allenspach, head of fixed income research
Stress on financial markets is the result of opposing forces. Actually, the tragic events in Nice and Turkey augur for investments in safe assets, in particular government bonds. At the same time, the news flow out of the US has improved to an extent that reignites the speculation on a further rate hike by the US central bank. The result of the tug of war between safe-haven demand and rate fear can be seen in the yield of the benchmark US 10-year Treasury note. It moved up from 1.35 per cent early last week to briefly touch 1.6 per cent after the publication of higher-than-expected numbers for US core inflation and industrial production on Friday, but fell to 1.55 per cent in late trading when news of the military coup in Turkey hit the screens. First indications this morning point to a yield of 1.57 per cent, not much changed from Friday’s close. The yield of the German 10-year Bund rebounded last week from -0.2 per cent to +0.003 per cent on Friday and is slightly down in negative territory following the news from Turkey.


East Capital: Emre Akcakmak, portfolio manager 
To put it bluntly, our base case is to see simply “more of the same”. In other words, politics will continue to be a major source of volatility, the economy will remain relatively resilient with another 3-3.5 per cent growth this year but investor sentiment will stay fragile. Recent developments mark neither the end of the Turkish investment case nor the beginning of a better democracy.

Investing only by looking at the headlines will continue to be unfruitful, as has been seen numerous times in the past. It will be important to continue to keep “strong nerves” which is probably one of the first things an investor should have while investing in Turkey. With that, it is important to review positioning especially in tourism-related stocks and stocks that are driven primarily by consumer confidence and exchange rate movements, but to keep eyes open for good opportunities that will certainly arise during times of high volatility. 

Trading already at 30 per cent discount to emerging peers (ie. highest discount in 7 years) with an expected price-to-earnings ratio of 9 times, Borsa Istanbul is already reflecting elevated levels of political risk premium despite a strong earnings growth of around 17 per cent expected this year. After all, the Turkish economy has numerous times proved to be more resilient than thought and companies continue to grow their earnings despite all the challenges they faced especially over the past few years. 

As confirmed also by our frequent meetings with the management teams of Turkish companies, there are still good opportunities even in the middle of deepest uncertainties and we will do our best to capture them.

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