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The Kapali Carsi

Have Turkish political risks been priced in?

Two of the three analysts interviewed by Wall Street Journal Turkey for an article with a similar title think so. Most of the investment professionals I have talked to this past week are of the same opinion.

That second sentence was confirmed when Turkish stocks rallied after the remaining detainees in the graft scandal, including Iranian businessmen Reza “Goldfinger” Sarraf and the ex-ministers’ sons, were released on Friday, causing a trader friend to note that “the stock market is buying theft!”:(

Anyway, I strongly disagree with this consensus assessment, and I explain why in my latest Hurriyet Daily News (HDN) column. As usual, you can read the whole thing at the HDN website. As for the addendum, let me start with the housekeeping. I could not post the WSJ article because it was in Turkish and HDN only allows hyperlinks in English. But here it is.

A Twitter follower noted that he found it hard to believe 80 percent of the ruling Justice and Development Party’s (AKP’s) followers did not use the internet. Since the AKP got 50 percent of the votes, and there are supposedly 50 million internet users, he is right in principle (but not mathematically). I think it all depends on what you mean by internet users. Take my aunt: She uses the internet, but just for Facebook (she has a dozen or so friends) and online card games. She has not seen any of the tapes! Anyway, as I mentioned in the column, that figure is from polling company SONAR, which was mentioned in another WSJ article in Turkish. So even if you don’t believe the figure, don’t shoot the messenger. As for the messenger, I think he does believe in the figure if you take a more specific definition of internet usage that would include only people who use the internet for news and stuff, are active Twitter users, etc. Turkey expert Aaron Stein seems to agree with me

Moving on, once you read my column, you’ll see that the billion-dollar question is: “So what percentage of the votes will the AKP grab?” Well, the answer is, honestly, I don’t know, and given there is so much variation in the polls (because of unethical as well as inept way of doing business), no one does! It seems the AKP is as much in the dark as the rest of us: In his WSJ oped last week (bending statistics as always, but I let him off the hook this time), Finance Minister Mehmet “Nominal” Simsek had the following to say: “Recent polls suggest that the ruling Justice and Development (AK) Party has public support between 40% and 50% for upcoming local elections in March.”

Of course, another way to ask the same question is: “How much will the AKP lose because of the graft scandal, and of course the recent phone leaks?” According to a Reuters article, which was done by talking to a dozen or so AKP supporters, not by much! But I think all the people the author of the article talked to were in  Kasimpasa, where Crime Minister Recop Tazyik Gazbogan spent his childhood and enjoys unconditional support. I often tell foreign journalists and fund managers I talk to, half-jokingly, that there a several million people in Turkey who would believe the world was flat if Gazbogan told them so. BTW, another Twitter follower told me about an interesting idea that could explain why the AKP may not lose votes by much: Status quo bias in decision making. Most people stick with the status quo under uncertainty. I don’t think there is any uncertainty on whether the tapes are genuine, but most of Gazbogan’s voters may not agree with me:)

And for some extra reading: Atilla Yesilada was the only contrarian voice in the WSJ article. Here’s one of his recent columns (in Turkish), written in a tone similar to mine. Semih Idiz, fellow columnist (politics) at HDN, on the other hand, argues that political turmoil will continue even if the AKP emerges victorious from the elections. I never thought someone could be more pessimistic than me- or Atilla for that matter:)

And some time for philosophy: Another Twitter follower made the following point: ” if we don’t have enough information right now, and need to wait until midterms, doesn’t that suggest proper pricing? I.e., the market is waiting for local election info as well” I see his point. He is technically right. I guess the theme of the WSJ article that inspired my column, and my column as well, is whether Turkish assets could fall further. Most analysts think they have hit the bottom, so the question is not one of “being priced in”, but one of “having seen bottom” My (and WSJ’s) mistake…

BTW, I don’t want to go into these too much, but I see several non-political reasons for Turkish assets to fall in the near-term as well. Take bonds, for example: Inflation could reach as high as 9 percent, and even hit double-digit territory with a negative food price shock or so, in the next two months. If that happens, you tell me if benchmark bonds rates could continue to hover around their current levels of 11 percent? Especially since the Treasury will be facing a heavy borrowing schedule in the next couple of months…

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