April’s election results and government actions in the wake of the tragic earthquake show that Turkey’s stockmarket is more than just a casino, says René van der Zeeuw of Robeco
It has only been 12 months since the last standing bull had to give up on Turkey. After Prime Minister Mesut Yilmaz’s resignation in November 1998, the country was supposed to enter a new ‘election spending cycle’ with general elections only six months away. And although caretaker Prime Minister Bulent Ecevit of the DSP did promise not to overspend after his appointment in January 1999, the Istanbul stockmarket remained in the doldrums.
Turkey was doomed to reenter an era of fragmented politics, continued budget deficits, overly ambitious party programmes and a lot of semi-political nonsense, all directly or indirectly related to more power for the establishment. From an investor’s point of view, this market was one to most definitely avoid. Only if local investors started to believe in the ‘old wine in new bottles’ rhetoric (fight inflation and more privatisations) could a short-term position be taken. During the last decade, the only profitable market strategy was to buy the market around election time and to sell it before politicians started to deliver.
However, this time around the Istan‘bull’ market started in February, two months before parliamentary elections. The reason for a 30% rally in February was the capture of Abdullah Oçalan, the infamous PKK ringleader. This was grist to Ecevit’s election mill. Voters started to see Ecevit as a serious candidate; a man capable of arresting Oçalan should also be able to kick-start economic reforms. So within weeks, the stockmarket started to expect an election victory for Ecevit’s DSP without the necessity of bribing the electorate with excessive fiscal spending. Ecevit and his DSP party maintained this positive momentum until the elections of 18 April. So did the Istanbul stock exchange: between the beginning of February and April 18 prices skyrocketed by 50% in US dollars. And Ecevit’s DSP won with 22% of the votes.
The 18% voters’ support for the nationalist party MHP and the miserable performance of the two centre-right parties, ANAP (13%) and DYP (12%), were even harder to believe than the DSP’s victory. The founding party of the Turkish Republic, CHP, also surprised by being unable to make the 10% threshold. From an investor’s point of view, voters should be rewarded for getting rid of CHP and giving the centre-right parties only lukewarm support. CHP proved to be an unreliable partner by bringing down the Çiller administration in the mid-1990s and withdrawing their support from the ruling coalition last year, which led to the downfall of the Yilmaz administration. In a way, it came as a surprise to see the centre-right parties (ANAP and DYP) still receiving enough support to pass the 10% threshold. Admittedly, Yilmaz of ANAP made good economic progress with the 1998 IMF staff-monitored programme. But the fact that two almost identical parties with similar ideologies are unable to cooperate should, at least from an investors point of view, be punished harder.
So should investors be pleased with MHP, the current bed partner of the DSP-MHP-ANAP coalition government, a party that was only known for its nationalistic ideas and lack of a party programme? Should foreign investors in the Turkish market be happy with a coalition of parties that in the past accused each other of being communists or assassins? Well, yes and no!
No, because this government is standing on very thin ice. Yes, because finally party leaders have started to prove that they are adult politicians, operating in Turkey’s best interest. A DSP-MHP-ANAP government can make good progress as it represents the largest majority in parliament since the mid-1980s.
The yes/no dilemma for investors resulted in the Istanbul stockmarket moving sideways in the summer months. Initially, they were hoping for a new IMF agreement. But when an IMF delegation left Istanbul in July demanding Ankara to deliver on reforms first, investors worried as Ankara’s track record on delivering was extremely poor.
However, this time Ankara did deliver. Even an earthquake and its terrible effect on many Turkish citizens was not enough to make the government shy away from its reform promises. After taking all measures necessary to give immediate assistance and financial support in the days following the earthquake on August 17, the government showed its commitment. In the 80 days after the Ecevit government received a vote of confidence from parliament, it passed 68 bills, including two amendments to the constitution, and pushed through some issues that had been on the back burner for many years.
For the first time the constitution was amended to include the term privatisation. The 1982 constitution mentioned only nationalisation and resulted in the Constitutional Court overturning important privatisation projects. The same amendment paved the way for international arbitration and lifted the compulsory approval of the High Administration Court.
The Social Security Bill was passed, raising the age for retirement by almost 20 years to 60 for men and 58 for women. The new Banks Law was passed, increasing the banks’ management responsibilities.
The much-criticised presence of military judges in the State Security Courts was changed by an amendment to the constitution. An important step towards reducing the criticism of Turkey’s human rights record. A law to fight organised crime was passed, which brought in a witness-protection programme and a wider authorisation to track down criminals. And a general amnesty was declared, reducing prison sentences by 12 years for all except those who have committed crimes against the state.
The government also had the courage to initiate discussions with its Greek neighbours. Both countries identified problem areas and will hopefully end their disputes in harmony and good cooperation. This is a fantastic breakthrough in Turkey’s efforts to become a candidate country for EU membership in the next millennium. Next December’s EU summit in Helsinki is crucial for Turkey. It is also good to see southern European countries, such as Spain and Greece, supporting Turkey’s application.
This was the background for the Istanbul stock market’s rapid recovery after the initial sell-off following the Izmit tragedy. It is now trading at $1.35 (see ISE National chart) or 100% higher than the September 1998 crisis level. However, the current market level is also 40% below the high of October 1997, and there seems every chance of breaking down the spiral of high fiscal deficits, high inflation and a weak currency.
So yes, from an investor’s point of view, Turkey has an excellent opportunity to transform itself from a punters’ paradise into an EU convergence play. It will definitively not be an easy road towards EU membership and convergence. There will be setbacks.
However, because this government has proven that it can deliver and with crisis-level interest rates and a stockmarket trading 40% below the previous high, the emerging markets team of Robeco Institutional Asset Management acquires holdings in Turkey: buy Turkey for Christmas and beyond.
René van der Zeeuw is emerging markets fund manager at Robeco Institutional Asset Management in Rotterdam

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