Most of my Turkish friends and associates are in despair this morning. Their arch-enemy Erdogan and his AK have stormed to victory again in both the presidential and parliamentary elections, with a surprising margin of victory in both contests.
Erdogan even more than Trump represents the perfect example of successful populist politics. I can’t say I like him, but he is phenomenally successful and hugely popular with main street Turkey. As a Liberal I could fill a book with the things that I dislike about him, but he clearly shows that a focus on a) jobs and infrastructure b) social values and c) nationalism wins every time. Liberals need to wake up and smell the coffee. If we’re to fight people like Erdogan and Trump, the battle has to be about economics, patriotism and immigration.
Anyway, on an investment level, my hunch is that Erdogan’s win is probably good news over the next few months/years for Turkey and equities. He’ll be keen to prove to his supporter base that he can deliver and much of the uncertainty about macro has been removed. In the long term, by contrast, I think its terrible news as I can almost guarantee that Erdogan will have a run in with the global bond vigilantes and it’ll be the Turkish Lira and local inflation that will come off worse!
Dispersion increases in global equities
Back in the developed world, it’s clear that global equities are struggling to make any headway, with the MSCI World hovering between +/-2% since the end of January. Emerging markets continue to struggle, losing 2.3% last week and down 6.1% so far this year. But these headline numbers mask some interesting cross-currents – returns from equities are heavily dispersed. A note out today from Andrew Lapthorne at SocGen points out that
“China has also been particularly weak, with the CS300 off 3.9% last week and down 10% so far in 2018. This is in stark contrast to the Russell 2000, which has been among the strongest performing indices over the last three months. Indeed, if Trump’s ‘Trade War’ is about rebalancing the prospects of US companies versus, say, China, then markets appear very much on message. The Russell has outperformed the CS300 by a remarkable 22% since the beginning of April.”
This is all slightly inconvenient for Andrew as he’s been worried about US Small caps for quite some time – he rightly observes that amongst these relative small caps, corporate leverage is high and profits are struggling. I suspect that Andrew is right though when he warns that if the Trade War talk fades, “then a reversal of this relationship could be on the cards”.
Back in the large-cap segment Lapthorne also notes that most of the gains in US equities can be “ accounted for by just a few FAANG stocks. However, such, an analysis perhaps overstates the narrowness of the US market, as for every big winner there is often a big loser as well. For example, the un-weighted average YTD performance of today’s S&P 500 constituents is +3.4% and the equal-weighted index shows a total return of 3.2% versus a weighted return of 4.0%. So while the FAANG performance is impressive – and perhaps concerning – S&P 500 strength is broader than often reported.”