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July 28, 2016

Turkey's Failed Coup Presents a Unique Opportunity for Investors

Emerging markets have had a tough few years. Slowing growth in China after the global financial crisis has meant reduced commodity demand and weaker investor sentiment for the group. Then the plunge in crude prices led to lower income for oil-producing nations, along with weakening currencies and falling foreign direct investment.
But 2016 looked to be the year the group could turn a corner. The price of oil and of some metals has rebounded, and dollar strength has plateaued. The iShares MSCI Emerging Markets (NYSE: EEM) was up 26% in mid-July from its January low.
One particular emerging market looked to be a standout among the group, with shares of its country fund up 37% from the January low just to the end of April. The country's current account deficit, the difference between exports and imports, shrank to a five-year low in 2015 and foreign investors were pouring money into the economy. That is, until political uncertainty started gripping the country in late April and erupted in a failed coup this month.
Shares of the country fund are now down 22% from their 52-week high and may be the best buy in emerging markets this year. Historical evidence shows that failed coups do not detract meaningfully from economic growth, and the President may now be able to push through his plan for growth spending.
Is The Turkey Country Fund A 'Gift from God'?
A military coup erupted in Turkey on the 15th, led by religious leader Fethullah Gulen and parts of the military. The government put down the insurrection and within days nearly 6,000 dissenters had been arrested within the army and judiciary.
President Erdogan himself called the coup a "gift from God" that allowed him to consolidate power and charge dissenters with treason. The President has promised "a new Turkey" and looks able to do it after the swell of support for him after the attempt. He's expected to ask parliament to grant him additional powers or call for a new vote on parliament membership which would likely lead to a majority for his party.
While foreign governments are pleading for a measured response from the Turkish government against dissenters and investors are rushing to the exits over the uncertainty of the government's call for a three-month state of emergency, there could be an upside for rational investors able to look past the selloff.
Lena Komileva, former Head of G10 Global FX Strategy at Brown Brothers Harriman, told Bloomberg she believes the failed coup will end up increasing political stability as Erdogan consolidates power. Recent global political uncertainty, from terror attacks around the world to Brexit, has weighed on the market, so increased political stability in Turkey could be a major advantage for investors in the country.
A slow bureaucracy and judicial checks on environmental impact have so far delayed Erdogan's massive construction projects and economic plans to become one of the world's top 10 economies by 2023. Greater control after the coup will likely see this infrastructure spending jump and could mean a snap back in economic growth.
Deputy Minister Simsek held a conference immediately following the failed coup and said that the Central Bank would provide unlimited Lira liquidity and drop the rate for intraday liquidity to zero to support the financial system after a flash drop in the currency over the weekend. Simsek said that 560 institutional investors and analysts listened to his Sunday address of the economy and said that the event will not have a significant impact on consumption.
A working paper this year by Erik Meyersson of the Stockholm Institute for Transition Economics suggests that the failed coup will probably not affect the country's growth and that it could still reach its 4.5% GDP target. On data from 1955 to 2001, failed coup attempts on democratic governments showed no significant effects on the economy.
Turkey has received $16 billion in foreign inflows over the first five months of the year as investors rush into the $780 billion economy. Turkey's economy has been one of the strongest among emerging markets, growing 4.0% last year and above 2% annually since 2012.
The iShares MSCI Turkey ETF (NYSE: TUR) plunged 6.7% on the Monday after the attempt and has fallen more than 13% as skittish investors head for the exits on the fear trade. Shares had been booming, up 17.4% year-to-date before the coup attempt easily outperforming the 11.5% gain on the MSCI emerging markets group. The fund holds shares of 70 companies within financials (44.6%), consumer staples (21.7%), industrials (12.1%), materials (8.4%) and three other sectors.
After the recent selloff, the fund trades for just 8.9 times trailing earnings and pays a 3.0% yield. Relatively strong economic growth and a benchmark rate of 7.5% should keep foreign money coming into the country, supporting the Lira and driving gains for the financial sector. Shares could rebound to around $40 each once investor fears subside for a 10% gain on top of the dividend yield.
Risks To Consider: Uncertainty could weigh on shares of the Turkey fund until news around the attempt calms and economic reports soothe market anxiety throughout the year.
Action To Take: Take advantage of the selloff on the iShares Turkey fund after the failed coup attempt to go long on one of the emerging market's strongest economies.
Courtesy Joseph Hogue, Street Authority (Archive here
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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