A reading of current geopolitical issues in Turkey by our emerging markets team.
In recent days, the Turkish market has given rise to strong comments:
“Turkey: No Thanksgiving Here”
– MRB’s Chart of the Week
“Is the (Turkish authorities’) plan going to involve more US dollar burning?”
– Wall Street Journal’s Daily Shot
“Rather have a bitcoin than a Lira today”
– CLSA’s daily
A scant six months ago, many observers were recommending that investors buy the Turkish market – even though Erdogan’s re-election seemed obvious, the rapprochement with Russia had already been announced, Erdogan’s rhetoric against Germany and the United States was the same as it is today, the oil price had already risen and economic stimulus (dangerous in a late-cycle economy) was already in place. The reality has not changed in the past six months. The United States has begun to impose sanctions on Turkey but, in our opinion, has only taken minor, inoffensive measures to date. As for respect for human rights, we think that securing the release of a U.S. pastor is only a façade designed to cover the real reasons for the Americans’ anger.
After a violent incident between Turkey and Russia in 2015, when the Turkish army shot down a Sukhoi Su-24M, which resulted in reciprocal economic sanctions, the relations between the two countries rapidly returned to normal, despite their profoundly different policies on the war in Syria. Has Putin changed his stance? We think so. Otherwise, how can we explain that the Turks invaded a Kurdish portion of Syria without the green light from Washington (which supports the Kurds) and with the tacit agreement of the Russians (who still support Assad)? Even though it looks very much like an alliance of convenience, a rapprochement does seem to have taken place between Russia and Turkey.
Turkey is still a member of NATO but we are seeing rifts with the United States and Europe. We have identified three fundamental factors:
In this context, we have to consider a scenario in which Turkey distances itself from the Western governments.
In our opinion, the financial markets can live with a dictatorship but not with an unstable regime. Erdogan realizes the economic power of sanctions, to his great chagrin. It is possible that he will suddenly bend to avoid a catastrophe, but his latest statements give the impression that he has not yet taken that path. Will Russia succeed in drawing Turkey into its orbit? It is easy to close ranks in the face of U.S. sanctions, but we must remember that Russia and Turkey are enemies of long date and that many factors continue to put them at loggerheads.
Beyond the geopolitical risks, we see macroeconomic risks in Turkey: our indicators are pointing to a strong risk of recession for the Turkish economy, with or without U.S. sanctions. Massive stimulus for an economy that was already growing rapidly has been accompanied by a rising current account deficit, which now stands at more than 6% of GDP according to Thomson Reuters. Spurred by economic growth and the increase in the oil price, inflation has spiralled upward. The Turkish lira has depreciated by more than 40% since the start of the year, and the short-term effects on the economy (higher inflation and more costly imports) should be negative.
The macroeconomic outlook is therefore too negative for us to consider the Turkish market an investment opportunity.
We believe there is some risk of contagion. The Turkish currency’s nosedive, coming after that of the Argentine peso, should prompt investors to wonder which currency will be next. Already, some observers are pointing the finger at countries with a current account deficit: South Africa, Indonesia and, to a lesser degree, India. Even though the economic situations in these countries are not comparable to Turkey’s, the increased volatility of their currencies is connected with Turkey’s lira crisis.
As for emerging market debt, international investors hold a great deal of it. A prolonged crisis in Turkey could undermine sentiment further, causing investors to review their positioning in this asset class and drawing other countries into the turmoil.
Given the instability of the regime, the geopolitical tensions, the macroeconomic risks and a possible contagion effect, we are inclined to favour a cautious approach to the Turkish stock market and the country’s currency.
Sources: 1 – France 24, 28/05/2016, RFI, 05/05/2017, Journal de Montréal, 04/07/2016 , 2 – CBC, 11/01/2018, 3 – Globe and Mail, 19/07/2016, Marianne, Wikipedia, 4 –Journal de Montréal, 09/07/2018, NY Times, 19/12/2014, Die Stern, 14/08/2018, 5 – Huffington post, 23/02/2016, Express (UK), 07/05/2018, Defense News (11/07/2018), Business insider, 01/06/2018, CNN, 21/06/2018, Europe1, 5/4/2018, Monde diplomatique, avril 2018
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