How Turkey's Failed Coup Could Impact Investors

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Turkey descended into chaos on July 15, 2016, after tanks rolled onto the streets of Ankara and Istanbul, but order was quickly restored the following day after President Erdogan returned to the country from a holiday and soldiers involved in the coup attempted surrendered. The President reassured investors that the country was back under control, but the fighting killed or wounded more than 1,500 people and around 6,000 have been detained so far.

In this article, we will take a look at the implications for international investors and some exchange-traded funds (ETFs) that may be most affected.

What Happened?

Turkey's failed coup attempt made headlines around the world, but the fighting occurred over the course of just two days.

A faction of the military ordered tanks into the streets of Ankara and Istanbul and issued a statement saying that the current political regime has lost all legitimacy and must be replaced. Shortly after the coup began, President Recep Tayyip Erdogan addressed the nation via Facebook’s FaceTime and CNN Turk and urged citizens to stand up to the uprising. The fighting continued into the following day until soldiers involved in the coup surrendered.

President Erdogan detained more than 6,000 individuals in response to the coup attempt, calling them ‘terrorists’ and threatening them with the death penalty. In addition, he demanded that the U.S. extradite Fethullah Gulen – an Islamic cleric and longtime enemy of the president that lives in self-imposed exile in the U.S. Mr. Gulen indicated that he would comply with U.S. orders and suggested the uprising could have been staged to legitimize a crackdown.

Potential Implications

Turkey's failed coup attempt could have a number of implications for politicians and investors that should be carefully examined.

Foreign officials have warned President Erdogan that the coup attempt did not give him a “blank check” to disregard the rule of law. In addition, U.S. President Obama expressed concern over pictures showing the rough treatment of some of the arrested coup plotters that were stripped down and handcuffed.

These actions have put tension on relations between the European Union, the United States, and Turkey – a key ally in the fight against ISIL.

The move has also dramatically shifted Mr. Erdogan’s power within the country. On one hand, all four political parties condemned the coup attempt in an unusual sign of unity, which could help improve internal politics. On the other hand, Erdogan will be able to further consolidate his power and win a possible referendum designed to make him an executive president with expanded powers – which could have a potentially destabilizing effect.

Investment Considerations

The Turkish coup attempt impacts a number of different international ETFs with exposure to the emerging market. According to ETFdb, there are 40 different ETFs with at least some significant exposure to Turkish investments.

The ETFs with the heaviest exposure include:

  • iShares MSCI Turkey ETF (TUR) – 99%+
  • SPDR S&P Emerging Europe ETF (GUR) – 20%
  • iShares MSCI Indonesia ETF (EIDO) – 20%

International investors should exercise caution when investing in these ETFs given the evolving nature of the political crisis. In addition, investors should be careful when trading the Turkish currency – the Lira – following the crisis.

The Turkish crisis could also have an impact on countries that fall into the same category or neighborhood – including many frontier and emerging markets. However, foreign officials have been quick to dismiss the event as an isolated incident that’s unlikely to have a wider impact on other countries.

The Bottom Line

Turkey descended into chaos on July 15, 2016, but order has been largely restored. For investors, the biggest risk at the moment is President Erdogan’s response to the crisis and the impact that the response could have on the country’s relations with the U.S. and Europe. International investors may want to exercise caution when buying Turkish ETFs or the Lira until the situation becomes clearer and the risks can be better quantified.