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Return To A Lost World

Turkey’s leadership has tried to turn the clock back 100 years. What does it mean for investors?

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Unless you’ve been sleeping in a cave for the last month, you won’t have missed the fact that Istanbul, Turkey’s most fascinating and beautiful city, was ringing to the sound of baton rounds and tear gas attacks for much of June. And that tens of thousands of what prime minister Recep Tayyip Erdogan calls terrorists, vandals and wreckers are currently set on ‘destroying’ the state.

Unfortunately, dear reader, it falls to us to tell you that he includes you and me among those wreckers. Erdogan’s latest parliamentary diatribes have accused the entire western financial system of deliberately manipulating his country’s markets so as to drive up interest rates and depress the country’s stock markets. And apparently he’s going to ‘throttle’ us foreigners for doing it.

Never mind that Turkey’s stock market grew by 62% last year, largely thanks to western investors who see this vibrant country on Europe’s periphery as the next big emerging-market thing. And never mind that if it weren’t for foreign bondholders, who are paying pretty decent prices incidentally, his country’s £8 billion a month budget overshoot would have sunk the economy years ago.

But then, Mr Erdogan is speaking to us from another time and another place. From the Muslim Ottoman empire, to be precise.

Forward to the 19th Century

Okay, the Islamic caliphate collapsed shortly before the first world war because it was too erratic and too authoritarian – and also because it couldn’t seem to stop itself from starting wars. And the country itself has been a secular democratic republic ever since Kemal Ataturk founded modern Turkey in the 1920s. And in recent years it’s managed to turn itself into a successful and quite modern state of XX million people – not least thanks to the efforts of Mr Erdogan himself, who has spent most of his ten? years in office building a strong economy.

But something has suddenly made the prime minister flip over, to reveal an authoritarian and hardline religious side that clearly makes him believe he can impose the hated old Ottoman ways on a young and well-educated population who are telling him they won’t stand for it. Never mind the fact that most of them are Muslims too – the difference is that  today’s Turkish Muslims are flexible and free-thinking.

Cultural Revisionism

We’d better justify that claim about the Ottomans. You’ll have noticed that most of the Istanbul demonstrations have happened around Taksim Square – only yards from Gezi Park, almost the last green space in the city. And you may be aware that Gezi Park is the site of the Ataturk cultural centre – practically a shrine to the founder of the modern republic. It’s a sacred site for the secular constitution.

Mr Erdogan’s plan is to tear down the Ataturk centre, more or less without consultation, and to build a replica of an Ottoman barracks on the site instead. Plus a mosque and a few other things. This hasn’t gone down well with a lot of people.

By the time you read this, there’s a chance that the matter will have disappeared into history. The ‘Turkish spring’ may have ended either in a violent police crackdown, a forced parliamentary resignation by both the premier and/or the more moderate president, Mo??? Gül – or, just possibly, an army coup. Most of these things won’t do much more than inflame the trade unions and instigate more problems that will probably spread across the country. A quiet end is quite hard to contemplate at the moment. As even Mr Erdogan’s own party is beginning to recognise. Splits are everywhere.

Will the Army Step In? And On Which Side?

Are we serious about the army? Absolutely we are. The Turkish armed forces have historically had little patience with the politicians, and they particularly mistrust Erdogan’s AKP party because of its Islamist leanings. The military has staged five successful coups in the last 100 years – three of them between 1960 and 1980 – plus any number of failed attempts. Only last year, three former army generals got 20 year jail terms for plotting yet another coup d’etat against Erdogan. And it’s recently been revealed that 20 senior soldiers who are still sitting in jail are there on trumped-up charges and fabricated evidence.

So the prime minister’s chances of getting the army’s backing now are less encouraging than you’d normally expect in this sort of situation. (Think Egypt, Libya, Tunisia or Syria.) Almost the only comfort, in fact, is that NATO would really hate a coup because that might imperil the air bases from which it has operated its military flights into Iraq and, more recently, Afghanistan.

Nor would it go down well with the European Union, which has kept Turkey in the queue for EU membership for two decades now, largely because it mistrusts its military intentions but also because Ankara has no hope of shaping up for membership of the euro club. Any more of this, and the doors will close for good.

This wouldn’t surprise the erratic Mr Erdogan, who spent much of the last decade trying to move Turkey away from Europe and toward the Islamic community in the Middle East. That wasn’t going to be an easy task for a non-Arab Muslim country which ius still regarded as an outsider. But for a while, Turkey was schmoozing Iran – a process that stopped dead when Iran began financing President Assad’s crackdown in neighbouring Syria. A few Syrian border attacks on Turkish villages, and the courtship was suddenly off.

What Does It Mean For Investors?

It’s not surprising that many people are worried at the prospect of the trouble spreading. Europe isn’t ready for an Islamic version of General Franco – and nor are the thousands of Britons for whom Turkey means holiday homes, Mediterranean holidays and some very promising investment portfolios.

Right now, the scare doesn’t seem bad enough to merit alarm on the financial front. Turkey’s economy is substantially self-sufficient, and only a full-on military flare-up would be likely to bring the areas outside Istanbul and Ankara into the conflict. And if we’re talking about foreign investment, the market itself looks friendly enough.

Istanbul is currently trading on a price/earnings ratio of 10, which isn’t so bad considering that the stock market was up by 62% last year alone. And its three year euro-denominated government bonds were producing wafer-thin yields of just 2.3% in mid-June.

The big worry in some quarters is that an unfettered Mr Erdogan may try to impose hardline Islamic law on the country’s financial markets. But that seems frankly fanciful in a world where so many other Muslim states are fully westernised in this respect.

There are, in short, arguments for keeping a close eye on Turkey as a buy opportunity. But only for those prepared to take the old ‘blood on the streets’ metaphor in a distinctly un-metaphorical way.