Personal Wealth Management / Market Analysis

Country Flash: Tension in Turkey

A look at the political changes Turkish stocks are contending with.

On July 29, Turkey’s four top generals (heads of the Armed Forces, Army, Navy and Air Force) stepped down in advance of a tribunal, which was set to begin August 1st, that would determine promotions within the military. By stepping down, the generals avoid being blamed for letting the government pick its own appointments on their watch. This likely cements civilian control of the military—completing the Turkish government’s steady erosion of the once relatively autonomous military’s power.

Why is this important? A brief history lesson: Since a 1982 coup, Turkey has been a mostly secular state, largely ruled by the secular elite and military. Though the country is technically a democracy, the secular elite have used their control of the courts to ban political parties perceived as threats to their power (this happened in 1998 and 2001). The current prime minister, Recep Tayyip Erdogan, has ruled since 2003 with steadily increasing clout as a strong economy heightened his popularity. His Justice and Development Party (AKP) won over 50% of the popular vote in the 2011 election—but this didn’t give the AKP enough seats in parliament to change the constitution without compromising with the opposition and taking it to the people for a popular vote, which Erdogan wants to avoid in order to push through his agenda, including abolishing (or at least extending) term limits. (Based on current law, he’s in his last term.)

Last year with the support of some members of opposing parties, the AKP was able to amend the constitution with a popular vote, which passed based on the improved civil liberties it included in order to move closer to becoming eligible for EU membership (although that has since become less likely). But tacked on that amendment were riders that changed the court system, significantly diluting the ruling elites’ control over the courts and political system. Specifically, it modified the appointment path to the Constitutional Court, which holds the right to ban political parties, and increased the number of court members from 11 to 17 to dilute the ruling elites’ appointments below the two-thirds majority required to ban a political party. Since then, the AKP has increased its attack on the military, jailing 40 generals (roughly 10% of all generals) and 66 other officers for an alleged coup. It is holding them without bail and has yet to allow the trial to proceed, all while making accusations in state-owned media.

The AKP has also increasingly cracked down on journalists, both jailing and suing them—the government currently has over 2,000 civil suits pending against journalists. It has also jailed members of opposing political parties, with members of both the primary opposition party and smaller Kurdish party behind bars. This includes an indictment this week of over 100 Kurdish politicians, including 98 mayors. As a result of the imprisonment of legislators, the Kurdish party’s MPs have refused to join parliament, and Erdogan is threatening to void all of the Kurdish seats and hold another election for them. His goal appears to be to secure enough seats to push through his desired constitutional change without the opposition’s input or a popular vote.

If Erdogan’s ploy is successful, Turkey seems on the verge of becoming a dictatorship (recall Hugo Chavez and Daniel Ortega’s similar attacks on term limits in Venezuela and Nicaragua, two recent examples of democratically elected leaders amending their way to dictatorship), and Turkey’s stocks market is one of the world’s worst-performing this year as stocks grapple with extant political tensions. Also contributing are fears of overheating as the country runs a large current account deficit and escalating questions about what would happen if foreign capital were to flee (the likelihood of which increases as the political situation becomes more tenuous). However, in the near term, the government is likely to remain very pro-growth as it tries to maintain the popularity necessary to push through its political agenda. For example, despite investor fears of inflation and overheating, the country unexpectedly cut interest rates by 50 bps this week to weaken the currency and stimulate exports.

Though Turkey is only a tiny slice of the global market, it provides a timely example of how political disruption can hinder a country’s stock market even as its economy remains strong. Stocks always weigh positives against negatives, and right now, Turkish negatives seem to be winning out. In a year when we expect returns to vary wildly between different countries, there are better opportunities elsewhere in the developing world.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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