A North Korean missile test and a referendum in Turkey. Koos Burema and Dimitri Chatzoudis of Robeco’s Emerging Markets Equities team give an update on their views for both emerging countries.
The Turkish people voted in favor of a Turkish-style Executive Presidency, with 51.4% of the votes. This implies sweeping powers for the President and very little oversight on his decisions.
From an investment perspective, the critical issue to watch is whether President Erdogan will, after this victory, change his focus from political to economic restructuring. After last year’s coup attempt, Erdogan has been busy consolidating his power and trying to build an environment that would be supportive for winning the referendum. It would be highly positive for the equity market if Erdogan were to change his focus and try to really improve the economic imbalances and structure of the Turkish economy. The first signs after the referendum have, however, not been positive in this respect. Erdogan has been talking about bringing back the death penalty, which only increases tension with the European Union and the state of emergency has been extended for another three months.
A risk that should not be underestimated is that the 2019 elections could be moved forward to 2018. In that case, it is highly unlikely that Erdogan will change Turkey’s current economic policies. He will probably continue his current course of stimulating the economy by increasing the debt in the system, which is good for economic growth in the near term, but creates substantial mid- to long-term economic imbalances. This combined with a loose monetary policy has been keeping inflation at elevated levels, has led to a high current account deficit and a weak currency.
We currently do not hold any positions in Turkey and we believe this is the appropriate stance, given the economic and political uncertainty. We are however open to building up positions in the future, but we would like to see a greater focus on economic restructuring, less debt creation and lower economic imbalances first.
There have been news reports of a failed missile test in North Korea, which was the last episode of increasing political tensions in the Korean peninsula.
Tensions between China, US and North and South Korea had already been mounting over the past two weeks, as President Trump made bold statements via Twitter and other media about a potential US attack on North Korea. These statements were followed by the US sending its nuclear powered aircraft carrier USS Carl Vinson back to the Korean peninsula. While we have been used to seeing tensions between the two Koreas rising and deflating over time, the difference this time is the increased involvement of China and the US. Talks between Chinese President Xi Jinping and Donald Trump in early April were an opportunity for the two countries to discuss the situation in the Korean peninsula, and it appears that the US has seized this opportunity to put further pressure on Mainland China to help denuclearize the North Korean regime.
While we recognize that the tensions in the region have escalated further than in earlier episodes, our base case is that, given the vested interests of all countries involved, we are likely to see some new ‘round-table talks’ to look for a solution. That said, the increased political tension is likely to continue until at least the South Korean presidential elections, which are scheduled for 9 May 2017. Following the elections, we should have more clarity on the future of South Korea’s Terminal High Altitude Area Defense (THAAD) missile system, which was started in July 2016 by former President Park in reaction to North Korea's fourth nuclear test.
The final decision on the actual deployment of THAAD will be taken by the incoming President. The two main candidates are Moon Jae-In (Minjoo Party, or Democratic Party) and Ahn Cheol-Soo (People's Party). Mr. Moon, who has been heading the polls, has stated that he is against the THAAD deployment. Mr. Ahn appears to be in favor of THAAD. Still, both candidates are expected to have a much softer stance against North Korea than former president Park.
In conclusion, we believe we will see renewed talks between South Korea, the US, North Korea and China, after the Presidential elections, trying to find a solution that can satisfy all countries. Clearly, we will continue to monitor the situation closely, mindful of the fact that international political tensions are a key supporting element of Kim Jong-Un's regime in North Korea and are therefore unlikely to fully fade.
From a portfolio perspective, we continue to have an overweight position in South Korea due to its macro-economic outlook, overall valuations and positive earnings revisions. From a political viewpoint, we expect political tensions to fade, but we will monitor potential escalations of the situation on a daily basis.
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