Erste Asset Management

What the Turkish referendum means for the capital markets

What the Turkish referendum means for the capital markets
What the Turkish referendum means for the capital markets
(c) Fotolia
Share post:

Amalia RipflAuthor: Amalia Ripfl
Senior Fund Manager

A “Yes” to Erdogan’s planned constitutional amendment in Turkey would constitute a double-edged sword for investors: the planned presidential system could mean a short-term relief for the markets and for the economy. However, in the long run, this scenario harbours big risks. That being said, a “No” would not help investors either.

How the coup added fuel to an already tricky situation

2016 was one of the most difficult years Turkey had ever faced – and the economy could not escape that fact either. The attempted coup in July and the state of emergency imposed in its wake led the conflict with the Turkish Workers Party PKK to intensify: an increasing number of terror attacks resulted in a 30% decrease in tourism revenues. And tourism is one of the most important source of foreign exchange for Turkey. After all, this sector has generated more than a tenth of the Turkish gross domestic product (GDP) in recent years. The stepped-up military engagement in Syria and the resumed diplomatic relations with Russia, which are burdening the relationship with the West, are also burdening the economy: both consumer confidence and consumption were significantly down in Q3. Since the coup attempt in July, the 2016 GDP expectations have been gradually revised downwards from 3.5% to currently 2.5%.

The Turkish equity market has seen a remarkable performance in the year to date, as manifested by the YTD performance of the Borsa Istanbul 100 index of +13.28%. However, this development is mainly due to the fact that some shares, especially in the financial sector, have been traded below their historical average and thus been picked up by investors buying on undervaluation. Also, these have likely been market movements in the run-up to the referendum. The market sentiment is in favour of a “Yes” vote – and many market participants seem to be hoping for stimulus measures from the strengthened President Erdogan. While this scenario might materialise, the current movements in the market distort the view on the actual state of the Turkish real economy. The Misery Index of Turkey, i.e. the sum of inflation and unemployment rate, shows a more revealing picture. While the Misery Index for Turkey was still at 16 points in July, it has meanwhile increased above 23.

What is at stake at the referendum

A “No” vote in Erdogan’s referendum would not only preserve the status quo of the constitution, but also that of the current political uncertainty. An accordingly negative sentiment on the financial markets would be likely, given that Erdogan is unlikely to give up his political ambitions easily. A resignation like in the case of Matteo Renzi in response to the failed Italian referendum seems completely improbable. The persistent political upheaval would continue to have negative effects on economic growth and thus also on asset prices on the Turkish stock exchange.

In case of a “Yes” vote, financial analysts share the same opinion: the planned constitutional amendment should bring about relief in terms of domestic politics and for the diplomatic relations with the European Union. The amendment would come with extensive consequences for the structure of the High Council of Judges and Prosecutors, which represents the highest authority in the judicial system. It would empower the President to decide on the members of the High Council and would does bestow him with judiciary power. The executive powers would also be transferred from the Prime Minister to the President. With this form of centralised power, Erdogan could abolish the Council of Ministers, would thus be solely responsible for the public budget, and could focus on structural reforms. In this case, the currently ailing economic growth could stabilise. Rising consumer confidence could also result in an appreciating Turkish lira. We are describing the exact scenario that the markets seem to be focusing on at the moment.

Short-term stimulus measures could become ineffective in the long run

In the long run, however, the transition to a presidential system would create two problematic areas that investors should also be aware of: the power centralised in the office of the President could trigger a random course of politics in combination with stronger control over the judiciary system. This would burden the business environment in Turkey and curb productivity growth, given that investments would fail to come through. Also, the President would have more power over the fiscal and monetary policy of the country. He would probably be directly responsible for the appointment of the future governor of the central bank. This could result in a looser monetary policy, especially since Erdogan has often and publicly stated his desire for lower interest rates. Given that the reserve capacities are exhausted, higher demand would lead to higher inflation. And at more than 8%, inflation is already a clear problem.

RESPOND TO THE ARTICLE

Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. The language of communication of the sales offices is German and the languages of communication of the Management Company also include English.

The prospectus for UCITS funds (including any amendments) is prepared and published in accordance with the provisions of the InvFG 2011 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in conjunction with the InvFG 2011.

The currently valid versions of the prospectus, the Information for Investors pursuant to § 21 AIFMG, and the key information document can be found on the website www.erste-am.com under “Mandatory publications” and can be obtained free of charge by interested investors at the offices of the Management Company and at the offices of the depositary bank. The exact date of the most recent publication of the prospectus, the languages in which the key information document is available, and any other locations where the documents can be obtained are indicated on the website www.erste-am.com. A summary of the investor rights is available in German and English on the website www.erste-am.com/investor-rights and can also be obtained from the Management Company.

The Management Company can decide to suspend the provisions it has taken for the sale of unit certificates in other countries in accordance with the regulatory requirements.

Note: You are about to purchase a product that may be difficult to understand. We recommend that you read the indicated fund documents before making an investment decision. In addition to the locations listed above, you can obtain these documents free of charge at the offices of the referring Sparkassen bank and the offices of Erste Bank der oesterreichischen Sparkassen AG. You can also access these documents electronically at www.erste-am.com.

N.B.: The performance scenarios listed in the key information document are based on a calculation method that is specified in an EU regulation. The future market development cannot be accurately predicted. The depicted performance scenarios merely present potential earnings, but are based on the earnings in the recent past. The actual earnings may be lower than indicated. Our analyses and conclusions are general in nature and do not take into account the individual characteristics of our investors in terms of earnings, taxation, experience and knowledge, investment objective, financial position, capacity for loss, and risk tolerance.

Please note: Past performance is not a reliable indicator of the future performance of a fund. Investments in securities entail risks in addition to the opportunities presented here. The value of units and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your units. Persons who are interested in purchasing units in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision. If the fund currency is different than the investor’s home currency, changes in the relevant exchange rate can positively or negatively influence the value of the investment and the amount of the costs associated with the fund in the home currency.

We are not permitted to directly or indirectly offer, sell, transfer, or deliver this financial product to natural or legal persons whose place of residence or domicile is located in a country where this is legally prohibited. In this case, we may not provide any product information, either.

Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to § 21 AIFMG for restrictions on the sale of the fund to American or Russian citizens.

It is expressly noted that this communication does not provide any investment recommendations, but only expresses our current market assessment. Thus, this communication is not a substitute for investment advice, does not take into account the legal regulations aimed at promoting the independence of financial analyses, and is not subject to a prohibition on trading following the distribution of financial analyses.

This document does not represent a sales activity of the Management Company and therefore may not be construed as an offer for the purchase or sale of financial or investment instruments.

Erste Asset Management GmbH is affiliated with the referring Sparkassen banks and Erste Bank.

Please also read the “Information about us and our securities services” published by your bank.

Subject to misprints and errors.