Turkish politics may become the top focus for the country’s investors, overshadowing decisions by the Federal Reserve, after stocks and bonds tumbled following the detention of prominent businessmen, Deutsche Bank AG said.
The Turkish lira slumped and stocks dropped the most in the world yesterday after the sons of two cabinet ministers and the chief executive officer of a state-owned bank were detained in a corruption probe by the financial crimes unit of Istanbul’s police force. The CEO of Turkey’s largest real estate company, whose biggest shareholder is the state housing authority, was also called in for questioning.
The raids are an escalation in a power struggle between Prime Minister Recep Tayyip Erdogan and followers of U.S.-based Islamic cleric Fethullah Gulen, who are influential in the judiciary and police force, according to Hakan Aksoy, who helps to oversee $5.5 billion of emerging-market debt at Pioneer Global Asset Management SpA in London. News of the detentions led to the biggest market declines in Turkey since June, when anti-government protests roiled the nation.
“Relations between business and the state are the key driver for emerging markets, so on the face of it this news is somewhat troubling and could represent a major escalation,” John-Paul Smith, a Deutsche Bank strategist in London, said in e-mailed comments yesterday. “Investors have been more focused on the prospect of Fed tapering and the policies of the central bank, but this may now change.”
The Borsa Istanbul 100 Index fell 26 percent since Fed Chairman Ben S. Bernanke said on May 22 that he could begin to cut monetary stimulus. The U.S. central bank will decide whether to start so-called tapering after a two-day meeting that ends today.
While Erdogan will probably seek to reach a truce with Gulen’s so-called “Hizmet” movement, investors will look to local elections in March and presidential elections in August next year to evaluate the potential impact of the strife, Pioneer’s Aksoy said. Turkish markets may remain volatile until then, and he would want to see assets cheapen further before adding to positions, he said.
The Turkish lira weakened 0.3 percent to 2.0420 a dollar at 10:45 a.m. in Istanbul, the third-biggest decline among 24 emerging-market currencies tracked by Bloomberg. The Istanbul 100 stock index dropped 2.6 percent today, after slumping the most among 94 equity indexes ranked by Bloomberg yesterday.
Five local police chiefs involved in the graft probe were re-assigned, Fox TV Turkey reported today.
Suleyman Aslan, CEO of state-owned lender Turkiye Halk Bankasi AS (HALKB), and construction magnate Ali Agaoglu were among 22 detained in the investigation into bribery, corruption in government tenders, money laundering and gold smuggling, state-run Anatolia news agency reported yesterday. The raids were probably a response to government plans to close private exam preparation schools, many of which are run by Gulen’s followers, according to Timothy Ash, a London-based strategist at Standard Bank Group Ltd.
Halkbank dropped 12 percent in Istanbul, the biggest decline since at least 2007. Property developer Emlak Konut Gayrimenkul Yatirim Ortakligi AS (EKGYO)’s stock also slumped 12 percent, the most on record. Police requested documents and information from Halkbank as part of the probe, the bank said in a statement to Borsa Istanbul, without giving additional information. Emlak Konut CEO Murat Kurum was called in for questioning yesterday evening, the company said.
Yields on Turkey’s two-year notes rose 25 basis points to 9.35 percent at the close today, the biggest gain since Nov. 26, according to data compiled by Bloomberg.
Yields on Turkey’s benchmark two-year debt have risen 479 basis points from a record low close of 4.56 percent on May 17. Morgan Stanley lists the country along with Brazil, India, Indonesia and South Africa as part of the “fragile five” of countries it says are most vulnerable to capital outflows should the U.S. cut stimulus.
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