Frankly speaking, exiting Turkey & Thailand is not an easy decision since I had such high hopes for these two countries during June. The hopes came to naught as both countries got caught up in political chaos and investors' confidence started to trickle away day by day. Initially, I thought that the political uncertainty will be short-lived and we will enjoy one short burst of rally as immediate concerns of the Fed tapering goes away. It seems like the political situation got worse in the last few days and the threat of a political upheaval will frighten away many investors looking to invest into these 2 countries. Rather to wait and pray for the politicians to straighten things out while the fund bleed day by day, cutting losses and getting into another sector with a better potential will probably be the better course of action.
Turkey & Thailand. A Tale of 2 "T"s
Turkey
In 2002, Prime Minister Erdogan came into power as his political party won a landslide victory after the country's election. At that point of time, Turkey was in deep recession and Prime Minister Erdogan managed to turn the economy around by attracting more foreign investors into Turkey by lifting many of the government regulations. The Erdogan government reduced their debt to IMF from $23.5 billion to $0.9 billion in 2013, reduced unemployment rate to 8.2% in 2012, the lowest level in the last 10 years and Turkey's credit rating was upgraded by Fitch and Moody's to investment grade after 18 years. However, a side effect of these policies was a widening of the current account deficit from 600 million USD to 48 billion USD. Turkey was on the way to become the next rising star among the emerging market economies when political unrest stopped foreign investors in their tracks.
The protest started as a sit-in during June 2013 to contest against the redevelopment of a central park in Istanbul. The sit-in turned into a protest as the people were outraged by the methods which the police evicted the sit-in. Not before long, the small protest grew to become one of the largest demonstrations in the past decade with an estimated 2.5 million people participating. The issues ranged from the authoritarianism of the government, the curb on media and internet freedom, to the war in Syria. The protests died down in August and reignited periodically every now and than. Investors were spooked by the scale of the protests and stayed away all summer.
Just as investment confidence was about to creep back into Turkey, another scandal broke loose. As part of a corruption investigation, the police detained dozens of people, including the head of a state bank and the sons of three cabinet ministers. In response, Prime Minister Erdogan dismissed dozens of police chiefs and he vowed to fight a corruption probe targeting his party. This will probably provide fresh fodders for the opposition parties to start another fresh round of massive protests, further destabilizing the investors confidence. Pairing this scenario with Turkey's current account deficits and Fed tapering, the chances for a strong year end rally dim by the day.
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| Mustafa Demir, AKP mayor of Istanbul’s Fatih district, was among those arrested. Source: National Turk |
The initial hypothesis for Turkey is that the market correction of 20%, as a result of the mass protests, along with the Fed tapering, has been overdone. The protests will die down and with clearer direction on the US Fed tapering process, the market will rally. The protest did die down and the Fed did give clearer direction on the tapering process, leading to a global stock market rally. However, the Turkish stock market failed to participate in the rally and instead, fell as a result of this new political uncertainty and since my hypothesis has been invalidated, its time to get out.
Thailand
The tale of Thailand is remarkably similar to Turkey, which I have elaborated in my past monthly letter. Upcoming emerging market economy, small protest snowballed into something big and political chaos ensued. What made matter worse was that the protestors, led by the opposition party, rejected the snap election proposed by Prime Minister Yingluck Shinawatra, which will put the whole political chaos in permanent crisis mode, short of a military coup. To complicate things, the Thailand's independent Election Commission suggested that the government shouldn't go ahead with the Feb 2 election, potentially dragging the issue even longer.
My hypothesis for the Thailand protest was similar to that of Turkey's, that it will be resolved in a few weeks time as the demands for an unelected "People's Assembly" are not widely accepted domestically or internationally. However, weeks dragged to months and there is no clear solution in sight as both sides refuse to back down. Investor's patience are getting low at this moment in time, as evident by the stock market performance.
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| Suthep Thaugsuban, protest leader and former Deputy Prime Minister. Source: Reuters |
Why Switch Now?
The January period is one of the most important period for the stock market as global stock market often rally strongly during this period of time. I was previously worried that the Jan rally will not be as strong due to the change of Fed leadership and potentially tapering that will happen in Feb. However, one of the biggest obstacle, the worry of Fed tapering, has been removed with the start of the tapering process 2 days ago. Given how uncertain the political saga of these two nations will last, I will have to cut them off as the opportunity cost of missing the Jan rally will be huge. On the other hand, the Euro zone has seen much improvement from the crisis in 2011 and 2012. The Euro has also been appreciating steadily as a sign of investor confidence as funds poured back into the Eurozone again. Given the high risk/high return/possibly no return positions of Turkey/Thailand, I prefer a safer bet on the recovering European markets.
Both the Thailand & Turkey fund lost around 14% but because our position is pretty small at 15%, the total damage to the portfolio is approximately 2% for the year. On the bright side, our US small/mid cap is undergoing a major rally and has surged more than 3% in the past few days and is positioned for a double digit return by year end.
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