Today we have a guest post by Derrick Irwin, CFA, of the Wells Fargo Emerging Markets Equity Fund.
The failed coup in Turkey will likely have greater geopolitical than economic consequences. For sure, the Turkish lira sold off sharply as the coup attempt developed, but it recovered some of those losses by Monday. The Turkish equity market fell sharply on Monday, but we expect that to be a one-off adjustment. Here are our thoughts on how the coup attempt's fallout could affect Turkey's economy, political dynamics, and oil industry as well as prospects for the entire emerging markets universe.
As for the coup attempt, we expect that to have a dampening effect on sentiment and investment, slowing what had been fairly impressive levels of foreign investment into Turkey in 2016. Turkey's tourism industry -- which had already been suffering in the wake of geopolitical instability and the recent terrorist attacks in Istanbul and elsewhere -- will likely continue to suffer. We had a call this week with the country's Deputy Prime Minister Mehmet Simsek and Central Bank of Turkey Governor Murat Cetinkaya, and they were at pains to reassure investors that they stand ready to support the Turkish economy and provide unlimited liquidity as needed.
Politically, this is a much bigger deal. First, the failed coup will allow President Erdogan to cement his grip on power and advance his agenda. He has slowly and skillfully purged the Turkish government, judiciary, and military of dissenting voices over the past several years, and this will allow him to accelerate this process. Most interestingly, the Turkish government is quite convinced that Fethullah Gulen and his Gulenist movement were behind the coup attempt. The Turkish government has insisted that the United States extradite Mr. Gulen from his compound in Pennsylvania, which the U.S. appears reluctant to do. This issue will create significant tension between Turkey and the U.S., and it could also affect Turkey's relationship with NATO. At a time when Turkey is at the center of some of the most significant currency geopolitical crises, a rift between Turkey and the U.S./NATO could further destabilize the region.
Regarding oil, Turkey has become a significant transport hub for oil in the region. The Bosporus waterway in northwestern Turkey carries almost 3% of global crude-oil supplies, while two major pipelines run through the region (reflecting perhaps another 1% to 2% of global crude shipments) and several gas pipelines are under development. However, operations were not meaningfully affected by the coup, and it is possible that a more stable government could lower the chances of future disruption. The flip side of this argument is that, should the Erdogan government mismanage its battle with ISIS and continue to antagonize Turkish Kurds, the country's oil facilities could come under threat. These facilities are heavily guarded, however, and would be difficult targets.
Will Turkey's failed coup affect other emerging markets?
We expect the spillover effects of Turkey's failed coup attempt to the rest of the emerging markets universe to be limited. A significant amount of Turkey's exports go to the European Union, and we think a disruption of these trade flows is unlikely. The weaker Turkish lira may even be a tailwind to exports. Turkey's banking system is reliant on foreign currency funding to a larger degree than many of its emerging markets peers, and this could be a potential source of weakness should foreigners decide to pare back financing flows into the country. However, the small size of Turkey's economy relative to global markets suggests economic contagion risk is limited. Politically, the results are much less predictable, as discussed, due to Turkey's geopolitical importance.
The key points investors should keep in mind are:
- The economic effects of last week's failed coup attempt are likely to be limited and constrained to the Turkish economy.
- Geopolitical ramifications are harder to predict and potentially far-reaching.
- The biggest risk is that a weak Turkish lira and cautious investors will make foreign exchange funding more expensive for Turkish banks.
The views expressed are as of 7-19-16 and are those of Derrick Irwin, CFA, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the authors and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.
Wells Fargo Asset Management (OTC:WFAM) is a trade name used by the asset management businesses of Wells Fargo & Company. Wells Fargo Funds Management, LLC, a wholly owned subsidiary of Wells Fargo & Company, provides investment advisory and administrative services for Wells Fargo Funds. Other affiliates of Wells Fargo & Company provide subadvisory and other services for the funds. The funds are distributed by Wells Fargo Funds Distributor, LLC, Member FINRA, an affiliate of Wells Fargo & Company.
Not FDIC Insured • No Bank Guarantee • May Lose Value
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.