My warning to all IstanBulls
Markets’ mood towards Turkey took a decisive turn for the better last week.
In my latest Hurriyet Daily News (HDN) column, I look at the different reasons for this change in mood, such as economic data, emerging market sentiment and political developments. I also give you my take on whether I agree with the optimistic assessments. Loyal readers who know my loyalty to the dismal science may have already guessed my verdict:), but you can read the whole thing at the HDN website. I have a few additional points to make:
Let’s start with the politics: While I am not a politics expert, I don’t think the Gulen-Erdogan war has been resolved yet. While the former’s men are keeping low at the moment, you never know when (and how) they may strike next. As for Erdogan’s presidential aspirations, I am not sure how he would fare against a popular candidate. After all, he has managed to polarize the country to an unprecedented degree: While half of the country would kill for him, the other half would like to kill him:)- I am exaggerating a bit of course, but you get the idea.
The other political development I did not mention came in late Friday, shortly before U.S. markets closed: The Financial Action Task Force decided not to put Turkey on its anti-money laundering and financial terrorism black list. That was no surprise; after all, despite photos of Erdogan’s son Bilal meeting up with Yasin Al-Qadi, who is suspected of bankrolling Al-Quaeda and is on U.S.’s terror list, Turkey is no Iran or North Korea. But when markets are euphoric, they find any excuse to rally. And the lira did indeed strengthen after the announcement, which came in around 20.00 GMT (22.00 Turkish time)- although a trader friend told me there were other reasons for the currency’s moves late Friday:
Similarly, when markets are euphoric, they find any excuse to ignore negative developments/data. For example, in its Monetary Policy Report submitted to the Congress on February 11, 2014, the Fed labelled Turkey as the most vulnerable emerging market and had a chart showing that currency performance was related to vulnerability:
FT’s Istanbul correspondent Daniel Dombey, who was the one who alerted me to the Fed analysis, also reminded me of a similar IMF chart in the latest Global Financial Stability Report. The IMF proxies domestic vulnerabilities with credit growth from 2010 to 2012 and external vulnerabilities with current account balance during the same period. Not only Turkey has the highest credit growth, it also has the highest current account deficit!
Moving on, Atilla Yesilada, one of my favorite Turkey economists/market commentators, published two columns related to my piece this morning. Unfortunately, both are in Turkish, but the arguments in the first are very similar to mine- I guess smart (or intoxicated with too much rum) minds think alike. Atilla makes one additional point: He argues that investors feel the Central Bank’s emergency rate hike showed that the government is ready to do the right thing to maintain stability. I would beg to disagree, as I argued in a recent column/post.
It is actually Atilla’s second column that is more interesting. He argues that Turkish equities are attractive in the long run for two reasons: First, he points to very attractive valuations. Even a cursory look would validate this claim, not only for Turkey but for other emerging markets as well- although I have to note that not everyone believes that is enough to justify entry, as a recent CNBC article shows…
Although he is usually more pessimistic than even me (as you know, I am no Pollyanna), Atilla also argues that the government, whether it is the ruling Justice and Development Party or another, will have to undertake serious structural reforms once it becomes apparent that Turkey cannot grow 5 percent in “the new normal” without external financing. I am not so sure, as I recently read Argentina’s sad story during the last 100 years in the Economist. After all, for each Korea out there, there is an Argentina. And I am really not sure at all, especially in the light of recent political developments, whether Turkey will be a Korea or Argentina…
Last but not the least, I did not have enough space to mention it in the column, but the other international development that lifted emerging market sentiment was better thane expected data from China. IMHO, a China hard landing is a bigger risk to the world economy (and emerging markets and Turkey) this year. Societe Generale recently simulated such a scenario; the summary in Bloomberg might be worth reading.
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