Erdogan Shakeup Erases $24 Billion as Turkish Stocks Lead Rout

  • Equity index falls 8.8% in May, worst month since late 2013
  • Lira slumps 5.3% as bonds suffer worst loss in emerging world

Recep Tayyip Erdogan.

Photographer: Drew Angerer/Getty Images

Turkish stocks slumped the most in more than two years in May as the political turmoil that prompted the premier to resign sent investors fleeing the country’s assets.

The Borsa Istanbul 100 Index fell 8.8 percent this month, the most since December 2013 and the biggest slide in dollar terms among 93 benchmarks tracked by Bloomberg worldwide. Some $24 billion was erased from value of equities as steps by President Recep Tayyip Erdogan to tighten his grip on power pushed Turkish 10-year bond yields up the most in emerging markets and sent the lira tumbling 5.3 percent.

Investors have grown wary of Turkey as a political showdown with Erdogan led Ahmet Davutoglu to step down as prime minister. His replacement, Binali Yildirim, has thrown his support behind Erdogan’s bid to centralize power in the presidency. Stocks were on course to suffer the worst outflows since November, the month Russia imposed sanctions on Turkey over the downing of a warplane and the AK Party won elections following a hung parliament earlier in the year.

"I would buy if there is normalization of Turkey relations with Russia and I would buy even more if there’s an end to the continuous cycle of elections and referendums," said Michel Danechi, who helps oversee $1.5 billion in emerging-market assets as a London-based money manager at Duet Asset Management. "But until any of these are in sight, Turkey remains an underweight for us.”

The nation’s assets were also dragged lower by a broader selloff in riskier assets in May stemming from the more than doubling of odds the Federal Reserve will increase interest rates in the next two months.

On the stock index, Turkiye Garanti Bankasi AS and Akbank TAS were the biggest contributors to the monthly rout, losing 12 percent and 7.3 percent, respectively. Foreign investors sold $645 million in Turkish equities through May 20.

The lira, which traded at 2.9511 by 6:24 p.m. in Istanbul, suffered its worst monthly loss since December 2013. Yields on the country’s 10-year bonds jumped 68 basis points to surpass 9.92 percent.

If history is a guide, June may also exert pressure on Turkish equities. Stocks have fallen during the month in each year since 2012, according to data compiled by Bloomberg.

Other indicators suggest shares may recover after the average price-to-book ratio outlook for companies on the Borsa Istanbul fell to 0.88 on May 20, the lowest since April 2009. The number of stocks on the gauge showing buy signals rose to 38 on Monday, the highest since Feb. 4, according to their moving average convergence-divergence data.

“Due to recent underperformance of Turkish stocks, there is a chance of a rebound, but that really depends now on how much the dollar strengthens from here,” Michael Wang, a strategist at hedge fund Amiya Capital LLP in London, said by e-mail.

Any recovery risks being short-lived due to domestic political concerns, according to Wang, who said he may reconsider his underweight recommendation on the country’s stocks and the currency should the Fed’s tone become more dovish.

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