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Turkey and the recent market movements

Photo: Reuters

Photo: Reuters

In the initial months of the year we had predicted that 2018 would be, a difficult year for investors and the word volatility will be the order of the day. Many market participants, including us, were aware that the prime concern were the increasing risks being triggered by the tit-for-tat between the US and China, in fact we’ve been mentioning this for the past months.

What many market participants, once again including us, were caught by surprise is the current uproar between the US and Turkey, a roar that splashed over financial markets and triggered an unavoidable volatile period.

Over the past months, the political situation in Turkey has to a certain extent deteriorated as market outsiders believed that Erdogan, the Turkish President, has continued to pursue his dictatorial approach, following election victory. This came to no surprise and foreign investors commenced pricing such uncertainty solely in the Turkish lira.

Domestically, the cherry on the cake came when Erdogan himself appointed his son-in-law as the new finance minister, a move which rattled once again the Turkish lira amid nepotism fears. To many this appointment was seen as a threat towards the independency of the Turkish central bank. To many the plunge in the Turkish lira following such appointment was the latest sequence of decisions taken by the President to enforce his power, and many believed that the lira had bottomed and might indeed imply an attractive entry point.   

The domestic political turmoil wasn’t enough to toughen the recent pain, as to the surprise of many last week Turkish markets rattled and were seen as contagious to other markets, due to the imposition of tariffs by the US on Turkey.

It seems that the decision by Trump himself was brought about the American pastor saga, which was imprisoned in Turkey, whereby the latter’s authorities failed to set free as per the US request. Such news triggered an exodus from the Turkish lira and prompted an immediate reaction on other emerging market countries and other developed economies. 

The Turkish lira touched record lows of 7.24 versus the US dollar on Monday, as investors flocked towards safer havens with the main beneficiaries being the dollar, the Swiss franc and the Japanese Yen. Equity markets shattered across the board with Italy and Spain being amongst the most impacted as investors feared that the exposures of Spanish and Italian Banks in Turkish assets will trigger a ripple effect across the board.

To the surprise of many Erdogan on Wednesday managed to secure a USD 15 billion deal with Qatar to invest in Turkey, a move to which the Turkish lira reacted positively as over the past days it recouped circa 21 percent from its lows.

Going forward, the situation remains very unclear given the fact that Erdogan is known as a hardheaded individual, which will not remain silent or accept any threat from any ally. The recent announcement of tariffs imposed on US goods imported into Turkey is a clear case in point. Undoubtedly, the recent market movements continue to add to the pain investors have experienced in 2018, indeed a difficult year.

In our view, the political noise will always be one of the toughest to fight back from an investors’ perspective. Moreover, the recent political noise is one, which can’t be easily tackled given its unpredictability and unfortunately fundamentals in the current circumstances are not given their entire importance. We are still of the view that ultimately a solution will be found and this is why it is imperative that investors are patient and follow a longer-term view. Yes, it’s a known fact, the current situation is not pleasurable at all, but being patient is crucial. 

Disclaimer: This article was issued by Jordan Portelli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice

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