The cross-continental country of Turkey went to the polls for its second general election of 2015 this month, and the definitive result has raised fund managers’ hopes of a resurgence in the former emerging market favourite.
On November 1, Turkey’s Justice and Development Party (AKP) returned to office with a majority, winning around 49 per cent of the vote. Financial markets welcomed the news, contrasting it to the uncertainty of the hung parliament produced by the country’s initial election this summer. Domestic equity markets and the Turkish lira both rallied as a result, but opinion is split on the likelihood of a longer-term rally.
As an emerging market, Turkey has seen its star dim more than most of late. Once a beacon of growth amid developing economies, more recent political and economic uncertainty has hit the country hard. The MSCI Turkey Index has underperformed the MSCI Emerging Markets Index by 2.9 percentage points over one year, and 14.9 points over three years.
Fund house Gam noted that Turkish equities’ recent move to multi-year lows have made them one of the worst assets classes of 2015 in dollar terms.
The AKP’s Recep Tayyip Erdogan, the country’s president and former prime minister, remains a divisive figure but commentators believe his party’s parliamentary majority is cause for stability. The election campaign did bring some promises of structural reform and a commitment to reverse Turkey’s ballooning current account deficit – two themes that have defined many emerging markets in recent years.
Abbas Ameli-Renani, an emerging market strategist at Amundi Asset Management, said the result was a positive development for Turkish assets.
“It removes uncertainty about governability in Turkey,” he said. “The combination of the AKP being able to form a single-party government and the Kurdish HDP also passing the 10 per cent threshold [ensuring AKP cannot amend the constitution] was the market’s best-case scenario.”
Turkey has many hurdles to overcome. Trevor Holder, emerging markets fixed income manager at Newton Investment Management said the outperformance of Turkish assets may be short-lived. He believed the AKP remained resistant to the necessary structural reforms, despite its campaign promises. “In the likely absence of imminent structural reforms, the loss of investment-grade status will remain a persistent downside risk to Turkey’s sovereign debt and the lira,” he said.
“High unit labour costs and persistent high-single-digit inflation will continue to erode Turkey’s competitiveness, suggesting further downside for the lira. For a country in which growth has been closely correlated to credit expansion, persistent external vulnerabilities and headwinds to positive foreign investor sentiment pose a considerable challenge to Turkey’s growth outlook over the medium term.”
Erdinç Benli, co-head of Gam’s global emerging market equities team, said HDP’s vote share reduced the risk of domestic political conflict, potentially allowing peace, stability and a government focused on economic prosperity.
“It’s also important to watch that the fiscal discipline is kept, because AKP mentioned some increases in fiscal spending during its campaign,” he said.
“After the strong bounce as a reaction to the election results, Turkish equities are valued with a price-to-earnings ratio of 9.5 for 2016 and are still trading with a discount of more than 10 per cent versus other emerging markets and still offer upside.
“The built-in risk premium of political uncertainty should now drop and it’s likely we’ll see investors return to Turkey. In particular, it’s likely that the banking and real estate sector will benefit from the positive sentiment. We also believe that government-related companies which suffered lately should outperform the market.”
Salman Ahmed, a global strategist at Lombard Odier Investment Managers, said the government’s relationship with its central bank will also play a crucial part in defining Turkey’s ability to attract renewed attention from emerging market managers. Mr Erdogan criticised the central bank earlier this year for not cutting rates more aggressively, but has since softened his position.
“Beyond the positive knee-jerk reaction in Turkish assets, the longevity of the moves will be determined by how the new AKP government manages its relationship with other key institutions, specifically, the central bank,” Mr Ahmed said.
