Turkey's Record Stock Prices Signal Erdogan Referendum Victory
Turkey's Prime Minister Recep Tayyip Erdogan
Andrew Harrer/Bloomberg
Recep Tayyip Erdogan, prime minister of Turkey.
Recep Tayyip Erdogan, prime minister of Turkey. Photographer: Andrew Harrer/Bloomberg
Investors are betting Prime Minister Recep Tayyip Erdogan will strengthen his hold on power at a nationwide referendum next week as stocks soar to a record high.
The benchmark ISE National-100 Index of stocks climbed 4.7 percent since Aug. 25, extending this year’s rally to 15 percent, the most among major European markets. The lira has strengthened 6.9 percent from this year’s low on June 7, while gains in bonds have cut two-year yields more than 16 percentage points to 8.11 percent from an all-time high in October 2008, according to an ABN Amro NV index.
Victory on constitutional changes that include curbing the power of the army and top judges would boost the prospects for Erdogan’s AK Party to extend eight years of single-party rule that oversaw record economic growth and single-digit inflation. A “strong yes” vote in the Sept. 12 referendum could lift stocks by 10 percent to 15 percent by the end of the year, said Ari Metso, chief executive officer of Helsinki-based Taaleritehdas East Asset Management.
“The probability for ‘yes’ is much higher than for ‘no’ in the referendum,” said Matthias Siller, who helps manage $4 billion in stocks at Baring Investment Services in London. “I expect many people that wouldn’t normally be the hardcore supporters of AK Party to make a pragmatic decision. This will eventually lead to a situation where Erdogan again scores victory.”
Referendum Outlook
Opinion polls don’t indicate overwhelming support for the referendum. Fifty-six percent of Turks will vote in favor of the changes, the Yeni Safak newspaper reported Aug. 12, citing polls from Genar Arastirma & Danismanlik Sirketi. The measures will pass with 53.4 percent of the vote, the Star newspaper said Aug. 27, citing a forecast by research company Andy-AR Sosyal Arastirmalar Merkezi. Forty-five percent of those polled said they will vote for the changes and 44 percent are against, newspaper Aksam reported, citing research company A&G.
“A&G is the most accurate pollster in Turkey with a proven record of some 20 years,” Olgay Buyukkayali, an analyst at Nomura International Plc in London, wrote in an Aug. 31 note to clients. “The recent poll by A&G suggests the outcome may be actually closer than signaled by previous polls and caution is warranted.”
Investors should hedge against a defeat for Erdogan because the forecast “is a toss-up,” Merrill Lynch & Co. strategists and economists, including Michael Harris in London, said in an e-mailed report on Aug. 27. A loss would make a coalition government more likely at the next election, Merrill said.
Erdogan’s Agenda
Erdogan, 56, who must call parliamentary elections by July, has made the push for constitutional changes a center-piece of his governing party’s agenda over the past six months. The powers of the army and judges should be curbed to strengthen Turkey’s democracy and win European Union membership, he says.
The army has deposed four governments since 1960, most recently a predecessor to Erdogan’s Justice and Development Party in 1997, also known as the AK Party. Dozens of officers, members of an institution legally defined as the defender of the secular constitution drawn up after a 1980 coup, are being probed for an alleged 2003 plot to overthrow Erdogan.
“A ‘no’ vote on the referendum would be a blow to the ruling AK Party, and would likely unnerve the market, which would then be fearful that the government would significantly loosen the fiscal purse strings in the run up to parliamentary elections due by July 2011,” said Tim Ash, head of emerging- market research at Royal Bank of Scotland Group Plc in London.
Spending Concerns
The government dropped plans last month to implement rules limiting the budget deficit, raising concern Erdogan is preparing the ground for more spending ahead of the election. Standard & Poor’s said Aug. 23 that Turkey’s sovereign rating may be raised should the government opt to save, rather than spend. The government appears reluctant to take advantage of the economic recovery to put budget measures in place ahead of general elections, S&P analyst Frank Gill said in a report.
A looser fiscal stance “would adversely affect Turkey’s credit fundamentals,” Moody’s Investors Service analyst Sarah Carlson said on Aug. 11.
Turkish stocks and bonds have rallied after the economic recovery accelerated to an 11.7 percent expansion in the first quarter, lagging only China among the Group of 20 industrialized nations. The economy shrank 14.5 percent a year earlier in the worst contraction in a decade. Even after gains in the country’s equities surpassed by more than 20-fold the 0.6 percent advance in the MSCI Emerging Markets Index of 21 developing nations, its shares trade at 10.7 times reported earnings, compared with 14 times for the global measure.
Rating Upgrades
Moody’s rates Turkey Ba2, two levels below investment grade, after lifting the country in January. Fitch raised its rating to BB+ in December, or one step below investment grade, and S&P boosted its ranking in February to BB. All three cited budget management and the strength of Turkey’s banking system, which posted record profits last year and required no government funds after the collapse of New York-based securities firm Lehman Brothers Holdings Inc. in 2008. The budget deficit narrowed an annual 42 percent in the first seven months of 2010, Finance Minister Mehmet Simsek said, Sabah newspaper reported on Aug. 24.
Strengthening the ruling party’s power means Erdogan may advance his Islamist agenda more easily, the main opposition Republican People’s Party says. Erdogan, who pledges allegiance to Turkey’s secular principles, has sought to make adultery a crime and allow women to wear the Islamic-style headscarf in universities. He called an early election in 2007 after the army opposed his candidate for president Abdullah Gul on grounds of his Islamist past.
Base Case
Citigroup Inc.’s “base-case scenario” is for an Erdogan win at the referendum, said Luis Costa, an emerging-markets strategist in London. “A ‘strong yes’ could be a point of support to the currency at this stage,” he said.
Templeton Asset Management Ltd.’s Mark Mobius said he may increase investments in Turkish companies, without providing a timeframe, according to an e-mailed response to questions on Aug. 24 from Bloomberg News.
“The referendum is a minor point to be considered,” said Mobius, who oversees about $34 billion as Singapore-based chairman of Templeton. “The referendum will probably have no impact on our view on the capital market in Turkey since the political environment will not change dramatically.”
The cost of protecting against a default on Turkish debt has dropped since December, with credit-default swaps falling to 165. The default swaps, which decline as the perception of creditworthiness increases, are now almost the same as Russia, rated four levels higher at Moody’s. The difference has narrowed from 40 basis points on April 20.
“Turkish local assets are a big darling right now,” said Agnes Belaisch, a London-based emerging-markets strategist at Threadneedle Asset Management Ltd., which has almost $100 billion under management. She is a former senior economist at the International Monetary Fund. “It is the best story in the region.”
To contact the reporter on this story: Seda Sezer in Istanbul at ssezer2@bloomberg.net.
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