Turkey Investors Could Learn From Russia Post-Crimea Markets

  • Russia’s RTS index has yet to recover from 2014 Ukraine events
  • Risks higher for Turkey, says EI Sturdza money manager Vanraes

When it comes to navigating strained relations with the U.S., Turkish investors may have lessons to learn from the experience of Russian markets.

Russia’s annexation of Crimea and the sanctions that followed three years ago are still weighing on asset valuations. While Turkey’s status as a commodity importer and historical U.S. ally are clear differences with Russia, the potential for investors to demand a hard-to-reverse political-risk premium is something the countries have in common.

Turkey’s risks in the eyes of investors have risen after shocks such as the November 2015 downing of a Russian warplane and the failed coup attempt last year, combined with deteriorating relations with European countries. Add to the list a diplomatic spat between Turkey and the U.S. that escalated on Sunday and has seen the two countries suspend visa services in each other’s country.

The dispute unnerved investors and dragged the valuation discount of Turkish equities compared with MSCI’s emerging market index to the widest level on record. At the same time, the equity valuation premium of Turkish stocks over Russian shares, which are the cheapest in developing markets, is now the narrowest this year. Since 2015, Turkish stocks have underperformed their emerging market peers by 27 percent in dollar terms.

Russia’s dollar-denominated RTS Index is still 10 percent below the level it was before President Vladimir Putin asked lawmakers to approve an armed intervention in Ukraine in March 2014. The gauge trades at 6.6 times estimated earnings, compared to 7.7 times for Turkey and 13 times for the MSCI Emerging Markets Index.

Although most money managers expect the feud with the U.S. to be temporary, here’s what investors are saying about the possible lessons Turkish markets could learn from Russia’s experience:

Anastasia Levashova, a fund manager at Blackfriars Asset Management Limited in London, who doesn’t expect the dispute to be long-lived:

  • “If you are becoming a geopolitical adversary of the U.S., check if your current account is positive, budget is balanced and you have enough reserves to survive capital outflows.”
  • “Calculate if your main economic trade partners will be still there for you, such as the EU, Iraq, and MENA in the case of Turkey. The overall Russian economy was more ring-fenced from the world and the U.S. than the Turkish economy because of less dependence on global capital, large reserves, etc.”
  • “Expect an extra discount to be put on your financial instruments, as Russian equities and bonds do have lower multiples and higher spreads just because they carry higher country risk, which includes a geopolitical and sanctions discount.”

Eric Vanraes, who oversees a bond fund from Geneva for EI Sturdza Investment Funds, which has about $3 billion under management:

  • “Turkey is not Russia, Recep Tayyip Erdogan is not Putin and Turkey is not a large oil producer, and the two countries don’t share the same neighbors, so the risk is much higher for Turkey, with many uncertainties.”
  • “The selloff in Turkish assets could be deeper than in Russia,” if the crisis and dispute drag on. “Russia is bigger and stronger.”

Julian Rimmer, an emerging-markets trader at Investec Bank Plc in London:

  • Three years later, the Russian stocks index in U.S. dollar terms has only “just recovered to the same level and the market almost halved” since; “few fund managers have the luxury of just sitting out that kind of volatility.”
  • “Every crisis throws up an opportunity at some point, but timing is paramount.”

Farhan Kazmi, the head of equities for Russia and Turkey at Credit Suisse Group AG in Moscow:

  • “What we can learn from the Russian story is that these things tend to get worse before they get better, although it’s tough to trade on politics. Chances are you will see more de-risking and weakness in the short-term as the situation is still unfolding.”
  • “We like Turkey, but the bigger question is how this is going to develop. What course do both sides want to take here, what has to happen before things get any better, and how will Turkey be treated: like an ally, a burgeoning friend or worse? Hard to tell.”

Ogeday Topcular, who helps oversee $300 million in fixed income as managing partner at RAM Capital SA in Geneva:

  • “In Russia, the Crimea annexation took its toll for almost 2 years. There was a big selloff and a correction, but then also we revisited the worst of the market and went deeper than the previous selloff. In a nutshell, the Russian situation was not easy to trade, and this could be the same for Turkey.”
  • “The first reaction is most likely to fade away, and then the focus would be on how the long-term economical and political situation develops in Turkey, which doesn’t show good signs.”
  • “The reaction of Turkey would be like Russia’s on the political front. But the market reaction also could be like Russia. In the long term it means a few years of dire markets and depressed valuations, before finding some balance. It will probably not be as severe as Russia, but a drag.”

— With assistance by Dana El Baltaji

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