Turkey: Unexpected events and uncertain future

Turkey witnessed a totally unexpected coup d’état attempt on 15 July 2016. Istanbul Ataturk Airport and the two bridges over the Bosphorus were taken over and blocked by a group of soldiers. Tanks, F16 jets and helicopters were all over the place in a matter of a few hours.

State TV was occupied and a statement, which suggested that the military took control of the country, that hurdles to freedom would be removed, that a secular and democratic state would be established and that corruption would come to an end, was announced.

President Erdogan was quick to respond. Live on privately owned TV channels via Facetime connection, he called the public to go to the streets and stand up against the attempt. Following a number of dramatic events which included an attack on the parliament in Ankara, chief of Staff reportedly being taken under custody by soldiers, protests and clashes in several cities, order was seemingly restored in about 12 hours.

The rest of the weekend has been extremely eventful with continuous news flow of clashes, arrests and detentions. I spent the last three days monitoring news almost 7/24 through social media and official sites, speaking to people in different parts of the country, and myself flew last night through Istanbul’s second airport, Sabiha Gokcen airport, witnessing the chaotic situation in Turkey’s largest city.

According to early news, nearly 300 people died, close to 2000 injured, almost 3000 military members and as many judicial people were detained and 8000 police officers were suspended from duty. The office of the President and Prime Minister called for people to stay on the streets, as “it may not be over yet”. Looking at the pace of developments, we understand that the government’s fight against Erdogan’s ex-ally, the Pennsylvania-based cleric Gulen moves to another stage with Erdogan considering the upcoming period “an opportunity to cleanse the system”.

Without a doubt, we will continue to see heavy news flow in the coming weeks as well. Snap elections, rewriting of the constitution and the presidential system will be only a few of the major debates to follow.

As asset managers managing one of world’s largest Turkey dedicated equity funds, we are concerned not only about short term but also about long term implications of what’s happening in Turkish politics.

How powerful will the political authority get? Will the current situation be a good opportunity for Turkish democracy or will it eventually lead to something worse? What will be the implications of constant political noise on the economy? How will the investment climate develop and how will investors react? These are some of the many questions waiting to be answered.

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% 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% discount to emerging peers (ie. highest discount in 7 years) with an expected price-to-earnings ratio of 9x, Borsa Istanbul is already reflecting elevated levels of political risk premium despite a strong earnings growth of around 17% 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.

Emre Akcakmak, portfolio manager at East Capital

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