The attempted coup against the Erdogan government by a group of army officers in Turkey brought a short sense of optimism in global markets to an abrupt halt Friday. A week in which the S&P 500 Index reached record highs after a 13-month hiatus and during which global stocks jumped to an eight-month high came crashing down by the end of the trading day.
Rallies in Tokyo and New York were just taking off when the anti-government military sought to seize power in Ankara, pushing U.S. equity futures lower in the last minutes of trading and sending the lira to the worst drop in eight years.
Geopolitical events over the last few weeks have caused chaos in global markets for investors and fund managers alike, sending them scrounging around for safe places to park their money at least for the short term in hopes that things will quiet down soon.
Terrorism in Paris, Brussels and Nice as well as Britain’s vote to secede from the European Union have caused a global impact that has kept investors under tremendous pressure this past year and the aborted Turkish overthrow hasn’t helped markets to present any semblance of reassurance that things will turn around quickly.
The impact on U.S. markets is uncertain. The S&P 500’s price-earnings ratio jumped above 20 percent last week for the first time in about seven years, helped by money flowing out of government bonds where yields hover near all-time lows and events in Turkey may prove to be an excuse for investors to hold off from jumping back into the markets.
Turkey’s Economy Exposed
Turkey’s economy has remained increasingly vulnerable since October 2015 when two bombs were detonated outside Ankara Central railway station killing 103 civilians. This was followed in March when a 28 year Saudi man detonated an explosive device inside a crowd of German tourists killing 10 people and injuring 15, and in April when a female suicide bomber blew herself up outside a historical mosque in Turkey, injuring at least 13 people. Just last month, at least 11 people were killed in a car bomb attack in central Istanbul.
Tourism to Turkey and foreign investment have dropped tremendously and according to economists the deficit is set to widen to 4.5 percent of gross domestic product this year, from 4.4 percent in 2015.
Turkey and Emerging Markets
Emerging markets have been doing well of late. The MSCI Emerging Markets Index has advanced 9.3 percent this year as a result of a recovery in commodities and the possibility for continued global central bank stimulus.
According to Paul Christopher, the St. Louis-based head global market strategist at Wells Fargo Investment Institute, which oversees $1.6 trillion, the latest event in Turkey may, however, set investors questioning the emerging-market rally and they may once again begin to look “more carefully at the fundamentals.”
A London-based strategist at a major emerging-markets consultancy warned its clients that the current situation in Turkey may “act as a catalyst for the next leg down in emerging markets as it sullies the entire asset class.”