Until last week Turkey’s equity market performance (TUR) was one of the best in 2016 among investable emerging markets, up more than 25%, second only to Brazil (EWZ) which is up 35.2% year-to-date.

But Turkey’s strong investment return has been largely wiped out by the political fallout from the sudden and unexpected resignation of Turkish Prime Minister Ahmet Davutoğlu effective May 22. As of Friday’s close on May 6, Turkey’s year-to-date return has fallen to 10.9%,behind Russia’s (RSX) 15.2% return for the same period. Political Risk is an Emerging Market Reality Various media outlets claim the prime minister resignedin an alleged political dispute with Turkey’s President Tayyip Erdoğan. ...

Political Risk is an Emerging Market Reality

Various media outlets claim the prime minister resigned in an alleged political dispute with Turkey’s President Tayyip Erdoğan. Vox.com reports “The Prime Minister was forced out because he couldn't get on board with the President’s plan to revamp the Turkish constitution to concentrate a dangerous amount of power in the office of the presidency.”

While all this makes for interesting political headlines, does it really justify a 18.4% drop in the value of Turkish equities in three days? Turkey’s economy seems to be performing well with an expected 2016 GDP growth of 3.8%,better than Russia and Brazil with expected 2016 GDP contraction rates of -1.8%and -3.8, respectively, according to the IMF’s World Economic Outlook (April2016).

Concern among investors is growing, however, about changing economic policies that may come with a new prime minister. “The Prime Minister’s departure raises questions about the government’s ability to tackle slowing economic growth and get passed into law the structural reforms that many investors see as necessary, ” says Euronews.

The Bottom Line

Markets hate uncertainty and tend to overshoot  in times of crisis. While this latest political uncertainty is unpleasant, it isn’t nearly as serious for the government as the Taksim Gezi Park protests were in 2013 when nearly 5000 people were arrested and 22 killed. Turkish markets should rebound relatively quickly provided investors are comfortable with the president’s choice toreplace the outgoing prime minister.

Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended asinvestment advice.

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