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Research Firm Warns of 'Putinisation' Risk to Turkish Stocks

It's not just a sovereign risk story.

The fallout from Friday night's failed coup attempt in Turkey is casting a shadow over equity investing in the $720 billion economy.

Strategists from Ecstrat Ltd., an emerging-markets research consultancy, invite comparisons between President Recep Tayyip Erdogan and his frenemy to the north, Russia's Vladimir Putin, following the former's reprisals against thousands of military, legal and judicial personnel in the wake of the botched coup attempt by a section of his army. 

They argue that what they call the 'Putinisation' of the Turkish political and economic system is gathering pace, characterized by a stronger executive, and darkening prospects for the rule of law and business.  

The strategists in a research note published on Tuesday wrote: "The ferocity of the government’s response in terms of the speed and extent of the arrests following the coup has raised concerns that the reaction could extend beyond those responsible for the recent events and lead to a broader consolidation of corporate control and the potential redistribution of assets." Ministers have said the reprisals are aimed at identifying the coup plotters, and the state of emergency they've triggered no different to ones imposed by European partners in the past. 

Still as the backlash spreads, Ecstrat was echoed this morning by Alberto Gallo,  head of macro strategies at London-based Algebris Investments. "Longer term, what we're seeing is the Putinisation of the country," he said in an interview with Bloomberg TV

The potential result: key listed family groups beholden to state favor, norms on corporate-governance and minority-shareholder rights undercut, and structurally lower stock-market returns, the consultancy argues.  On Wednesday, Deputy Prime Minister Mehmet Simsek issued a business-as-usual plea on Twitter to investors, as a state of emergency took hold. 

The Turkish stock market remains largely in private hands relative to Russia, Ecstrat estimates, referring to equities that are seen as available for investment by foreigners: typically those with a market capitalization of over $500 million, and with a three-month average daily trading volume greater than $1 million. On this basis, Ecstrat reckons 60 percent are under the control of family-owned conglomerates. Meanwhile, 16 percent are directly or indirectly are controlled by the state. In Russia, 51 percent of stocks are under effective government control, the consultancy calculates. 

Source: Ecstrat

Shares in Turkiye Is Bankasi, a lender with historical ties to the opposition CHP, have lost almost a quarter of their value over the past year, while the operations of Asya Katilim Bankasi AS — a lender linked to supporters of the U.S.-based cleric who the government accuses of instigating the failed coup — were suspended on Monday, a year after a government takeover. The deputy prime minister stressed on Twitter that Turkey remains committed to a market economy. 

In sum, while foreign investors have largely focused on the uptick in sovereign risk, shifting geopolitics also cast a shadow over the corporate sector, the strategists say. Nevertheless, the 'Putinisation' analogy only goes so far. They argue there will be little "overt redistribution, with the possible exception of further state control over the media sector." In other words, the president wouldn't risk destabilizing financial markets in order to maximize state influence over the private sector in the same vein as Putin since the arrest of Mikhail Khodorkovsky in 2003, they argue.

XU100 Index (Borsa Istanbul 100  2016-07-21 08-17-53
Source: Bloomberg

The strategists' conclusion echoes the oft-touted theory that liberal democracies boost stock market returns while, conversely, rent-seeking and weak investor protections depress them. "Turkey occupies a middling position for its level of development in the World Bank and World Economic Forum indicators for business and the protection of minority investors. On the other hand, Turkey has moved into the bottom half of countries for press freedom, the quality of democracy, economic freedom and human right. We believe that equity investors ignore these contextual factors at their peril, since governments that suppress transparency and human rights will have little compunction about trampling over minority investors if they perceive that it is in their interests to do so."

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