Editors’ Note: MarketMinder Europe is politically agnostic. We prefer no party nor any politician and assess developments for their potential economic and market impact only.
Between Turkey and Thailand, it appears Emerging Markets (EM) investors have bought a lot of hope in recent days. Turkish stocks soared 12.5% last week—including a 9.2% jump Thursday—as investors seemingly grew optimistic voters would oust its longtime leader, President Recep Tayyip Erdogan, at Sunday’s election.[i] Meanwhile, in Thailand, pro-democracy parties won a combined majority in the lower house Sunday, raising hopes that the military junta will soon cede power.[ii] But now in both places, we think reality is setting in. In Turkey, local stocks fell -8.2% Monday after Erdogan beat pollsters’ expectations, teeing up a 28 May runoff in which he seems to have an edge.[iii] Thai stocks fell, too—though by not nearly as much—despite commentators’ cheer over the outcome.[iv] We see lessons here for investors, regardless of whether you dabble in EM stocks: Hopes and possibilities are a flimsy basis for an investing thesis, in our view.
Given Erdogan has won past elections amidst ostensibly insurmountable odds—including currency crises, rapid inflation and severe unrest—it might appear odd that markets seemingly spent last week pricing his defeat.[v] Polls might have pointed to a close contest, but observers have long seen the telltale signs of ballot-stuffing and other shenanigans in Turkish elections.[vi] Yet optimistic commentators we follow have argued that a fractured opposition was the main roadblock to beating Erdogan, so when several opposition parties coalesced around a single challenger—Kemal Kilicdaroglu—and polls gave him a slight lead, investors apparently got excited.[vii] Observer enthusiasm reached fever pitch Thursday when another challenger, Muharrem Ince, withdrew at the last minute, further consolidating the opposition vote.[viii] As investors seemingly added Ince’s polling percentages to Kilicdaroglu’s, markets appeared to price in Erdogan’s defeat.[ix] To paraphrase the legendary investor Benjamin Graham, in the short term, markets are like voting machines—a comparison with perhaps more meaning than normal here—and they can sway on popularity and hype.
But then we think the reality check came. Early returns from Sunday show Erdogan with 49.5% of the vote, ahead of Kilicdaroglu’s 44.9%.[x] Presuming neither candidate ekes out 50% in the final results, they head to a runoff on 28 May. Most commentators we follow say Erdogan will have the edge. They cite voter fatigue as one reason. Observers also cite fiscal policy, as Erdogan’s government has used widespread handouts including public sector wage hikes and free petrol to boost his appeal.[xi] Conventional wisdom suggests to us this will likely be more attractive than Kilicdaroglu’s economic policy, which hinges on raising interest rates and restoring normal monetary policy.[xii] Then there is the fact that the eliminated, third challenger, Sinan Ogan, will likely play kingmaker as the 5.3% of voters who backed him are now up for grabs.[xiii] He hasn’t endorsed either remaining candidate yet, but he ran a hard-right campaign, leading many observers to presume his supporters will gravitate to the conservative Erdogan. Accordingly, Turkish stocks reversed much of last week’s returns Monday, seemingly coming to grips with the reality of Erdogan entering his third decade in power.[xiv]
In our view, this should be a bit of a cautionary tale for those cheering Thailand’s potential change in government now. Yes, pro-democracy parties won over half of the House of Representatives’ seats in Sunday’s election, whilst military-aligned parties suffered heavy losses. Unofficial results give the grassroots Move Forward party 151 seats, whilst Pheu Thai—a pro-democracy movement aligned with exiled former Prime Minister Thaksin Shinawatra—won 141.[xv] Theoretically, their combined 292 seats in the 500-seat lower house gives them a comfortable majority to pass legislation, and the two have already agreed to form a coalition.[xvi] So at first blush, we think it is easy to see why Thai stocks jumped in pre-market trading Monday as investors cheered the prospect of the military junta stepping aside for the first time since 2014.[xvii]
But they reversed course and finished the day down -1.1% in GBP, as a more complicated reality seemingly began setting in.[xviii] For one, 2014’s crisis centred around the ouster of Thaksin’s sister, Yingluck, who military-aligned opponents argued was a figurehead for her brother.[xix] The military’s yellow shirt supporters faced off against Thaksin’s red shirts, and a months-long standoff resulted in a military coup that ousted Yingluck and installed Prayuth Chan-ocha as prime minister.[xx] Now Thaksin’s daughter, Paetongtarn Shinawatra, is Pheu Thai’s leader, etching familiar dividing lines.
Paetongtarn took herself out of the running, agreeing to support Move Forward leader Pita Limjaroenrat as prime minister. By Limjaroenrat’s count, their potential coalition has 309 seats including small-party support.[xxi] But we think it may not be enough. In Thailand, forming a government requires winning a majority in a bicameral legislative session—House plus Senate.[xxii] All 250 Senators are unelected military appointees, giving the military the dominant hand and thus complicating the return to civilian government. The civilian coalition is still far shy of the 376 votes needed for a majority, and we don’t think it is clear that they can form the alliances necessary to overcome potential military opposition.
So we see a high likelihood that investors’ current enthusiasm proves short lived. We think the initial cheer will probably give way to uncertainty as investors gain a clearer view of how complicated it will be to end military rule. At the very least, we suspect political uncertainty may be elevated until July’s end, when the legislature is set to choose the prime minister. In our view, if there is no clear majority at that time, uncertainty could linger—especially when you factor in Thailand’s long history of political discontent and the prospect, which some analysts have mooted, of the military and courts working together to stymie civilian rule. We think this could delay passage of the 2024 budget and a meaningful return on investment.
In our experience, in the very short term, markets can move on all sorts of things, including possibilities and irrational hopes. But over more meaningful stretches, our research shows they move on probabilities. When investors see quick moves up like Turkey’s last Thursday or Thailand’s early Monday morning, we recognise it can be all too easy to extrapolate those results forward and pencil in good times for markets ahead.[xxiii] But when a market rally’s chief fuel is hope, not a reasonable probability of fundamental improvement, we find it often fades as quickly as it arrives. And not just when EM politics are involved. We showed earlier this month how quickly Energy stocks faded after pricing in hopes that lower production quotas from the Organization of the Petroleum Exporting Countries would turbocharge oil prices.
This sort of thing happens over and over and over. In our experience, not only does the great big hope get priced lightning-fast, but it rarely plays out as the proponents say. So if you ever find yourself enticed by a big move and a nice story, remember: Markets are efficient, and you can’t buy past returns.
[i] Source: FactSet, as of 15/5/2023. MSCI Turkey Index returns with net dividends, 5/5/2023 – 12/5/2023 and 10/5/2023 – 11/5/2023.
[ii] “Thailand’s Opposition Parties Start Alliance Talks After Voters Reject Military Rule,” Rebecca Ratcliffe, The Guardian, 15/5/2023.
[iii] Source: FactSet, as of 15/5/2023. MSCI Turkey Index return with net dividends, 12/5/2023 – 15/5/2023 and “Erdoğan Leads the Way Into 2nd Round Clash As Rival Disappoints in Turkish Election,” Christian Oliver and Elçin Pyrazlar, Politico, 14/5/2023.
[iv] Source: FactSet, as of 16/5/2023. Statement based on MSCI Thailand Index returns with net dividends, 12/5/2023 – 15/5/2023.
[v] Source: FactSet, as of 15/5/2023. MSCI Turkey Index returns with net dividends, 5/5/2023 – 12/5/2023.
[vi] “Turkey – 2023 Presidential and General Election,” Politico, 12/5/2023 and “Challenges and Opportunities in Turkey’s 2023 Presidential Parliamentary Election,” Ayça Alemdaroğlu, Stanford University, 9/5/2023.
[vii] “Turkey Set for Runoff as Erdoğan Falls Just Short of Victory,” Firat Kozok, Beril Akman and Selcan Hacaoglu, Bloomberg, 15/5/2023. Accessed via Yahoo! Finance.
[viii] “Erdoğan’s Rival Boosted By Withdrawal Ahead of Turkey Presidential Vote,” Staff, Reuters, 11/5/2023. Accessed via NBC News.
[ix] Source: FactSet, as of 15/5/2023. MSCI Turkey Index returns with net dividends, 5/5/2023 – 12/5/2023.
[x] “Turkey Set for Runoff as Erdoğan Falls Just Short of Victory,” Firat Kozok, Beril Akman and Selcan Hacaoglu, Bloomberg, 15/5/2023. Accessed via Yahoo! Finance.
[xi] “Erdoğan Gives Public Workers 45 Percent Pay Rise in Turkey’s Tight Election Race,” Elçin Pyrazlar, Politico, 9/5/2023 and “Erdoğan Plays Energy Card in Turkish Election – With Putin’s Help,” Gabriel Gavin, Politico, 4/5/2023.
[xii] Turkish inflation tops 40% y/y, per FactSet, and high inflation is a long-running problem. But Erdogan holds the rather unorthodox view that high interest rates cause, rather than fight, fast inflation—and has fired several finance ministers and central bank heads who advocated for higher rates.
[xiii] “Turkey Set for Runoff as Erdoğan Falls Just Short of Victory,” Firat Kozok, Beril Akman and Selcan Hacaoglu, Bloomberg, 15/5/2023. Accessed via Yahoo! Finance.
[xiv] Source: FactSet, as of 15/5/2023. MSCI Turkey Index return with net dividends, 12/5/2023 – 15/5/2023.
[xv] “Thailand’s Opposition Parties Start Alliance Talks After Voters Reject Military Rule,” Rebecca Ratcliffe, The Guardian, 15/5/2023.
[xvii] “Thai Stocks Reverse Gains As Opposition Parties Secure Strong Majority in Election,” Lim Hui Jie and Clement Tan, CNBC, 15/5/2023.
[xix] “Thai Court Rules General Election Invalid,” Staff, BBC News, 21/3/2014.
[xx] Ibid and “FactBox-Parties Contesting Thailand’s Election,” Chayut Setboonsarng, Reuters, 11/5/2023. Accessed via MSN.com.
[xxi] “Thailand’s Winning Opposition Parties Agree to Coalition, But Junta-Appointed Senate Still a Force,” Staff, Reuters, 15/5/2023. Accessed via CBC.
[xxii] “Thailand,” The World FactBook, CIA.gov, 9/5/2023.
[xxiii] Source: FactSet, as of 15/5/2023. Statement based on MSCI Turkey Index and MSCI Thailand Index returns with net dividends, 10/5/2023 – 11/5/2023 and 12/5/2023 – 15/5/2023, respectively.
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