Alfred Lettner - Failed Coup in Turkey Could Help Other Emerging Markets

As far as global financial markets go, a failed military coup attempt in Turkey over the weekend was barely a blip on the radar screen. Even other developing economies, which may have the most to lose if investors paint the whole emerging markets space with broad bearish strokes, remained resilient.

“I think most investors realize that developments in Turkey don’t have a direct impact on emerging markets,” said Simon Conway, Investment Director at Alfred Lettner, the independent financial advisory firm based in Austria. “Turkey is still a fairly small economy, and so would have limited impact on global growth or trade flows.”

Turkey’s gross domestic product totaled $718.2 billion in 2015, making it the world’s 18th largest according to the World Bank.

Conway acknowledged that there is the possibility of a spillover of negative sentiment to other emerging markets, but the risks are muted for now.

“The Turkish lira extended its decline against the U.S. dollar to trade at 2.97 while stocks and bonds remain under pressure,” added Simon, “But in contrast to the high drama that unfolded in the Eurasian country, it pretty much remains business as usual.”

Alfred Lettner’s Turkish Market Specialist, Mehmet Arslan said that the failed putsch is not likely to be a big factor for the Turkish economy.

The economist forecast Turkey’s gross domestic product growth would slow to 3.3% in 2016 versus 4% last year. Erguzel revised down his projections for the country’s tourism revenue to $18 billion from $22 billion.

Arslan said, “Instability has long been a feature of Turkey’s sovereign credit profile.Friday’s coup attempt by elements of the Turkish military highlights the country’s turbulent political environment.”

In the U.S., both the Dow Jones Industrial Average and the S&P 500 hit record highs. Stock markets in Brazil, Mexico, and Korea also rose, prompting one economist to point out that emerging markets have become increasingly immune to global volatility in recent months.

The two exceptions to emerging-market stability are fears about a slowdown in China and an abrupt interest rate increase in the U.S. - both relatively remote possibilities, according to Simon Conway.

“If we are right, then volatility is likely to remain low in emerging markets. With valuations also generally depressed, we continue to expect them to perform well,” he said.

Turkey’s problems could, in fact, be a boon for other emerging markets as investors chasing higher yields look elsewhere.

“I think that other emerging markets may be the beneficiary of Turkey’s turmoil. Investors are likely to seek out other alternatives to Turkey,” said Conway.

Brazil and South Africa may be the chief beneficiaries, he said.