Poland and Turkey’s stock markets are soaring, up 38% and 35% respectively, making them the best performing markets in the MSCI EM universe. But Russia is in its traditional place of worst performing market YTD, down 15%.
The result is somewhat surprising as all three markets are wracked by political turmoil, but portfolio investors don’t seem to care. Poland saw massive street demonstrations at the weekend as the ruling PiS party tried to ram through illiberal reforms that would give it political control of the courts. Due to the size of the popular protests the president vetoed two of three contested bills at the last moment.
Likewise, this month hundreds of thousands of people marched on the capital Ankara in one of the biggest popular protests in the region for years. A week later, Turkish President Recep Tayyip Erdogan struck back with an equally big pro-government rally on the anniversary of the attempted coup. The Turkish government then prolonged a state of emergency for another three months that has effectively suspended the rule of law and continued Erdogan’s epic purge that has seen hundreds of thousands of people sacked from their public jobs from across the spectrum.
Russia is in no better state and if anything the opposition movement is far more muted having been cowed by increasingly repressive laws. Nevertheless, anti-corruption blogger and opposition leader Alexei Navalny managed to get thousands of young protesters onto the street in regional cities across the country this summer in an impressive show of defiance. In the latest infraction on civil liberties, film has emerged of these protests with face-recognition technology that identifies participants and their families. To add to the Kremlin’s woes, the US government has just voted through new tougher sanctions that specifically target the oil and gas business, among other things.
And the money keeps flowing – in both directions. Turkish equities experienced an inflow of $48mn in the week ending July 7 as the benchmark BIST-100 tested a new record high of 104,915 on July 13, Turkey's central bank said the same day. In the same week, Russia saw the biggest outflows of the year following the announcement of the impending new US sanctions bill.
Despite the similarities in these political upheavals, the stock markets of the three counties are behaving very differently as it seems that equity investment decisions are now completely divorced from politics.
The differences can be linked to economics where despite their political problems both Poland and Turkey growing strongly, expanding by 4% and 5% in the first quarter of this year respectively, while Russia is still struggling to climb out of its two year long recession and grew by a meager 0.4% in the same period.
Poland is now approaching maturity as an EU country, which means its has the institutions to give business more confidence in the country’s future and protect their investments. This is why the PiS programme to undermine those very institutions is so worrying. However, this week’s events highlight that both the institutions are already relatively robust and that the other EU members will act to safe guard against any backsliding.
The Warsaw Stock Exchange (WSE) has been a big winner from both this stability and the size of the country, increasingly attracting IPOs from across the region and has emerged as the premier venue for companies from Central and Eastern Europe (CEE) to raise capital.
Turkey’s equity boom is built on sandier foundations. One of the drivers of the market is a mysterious trader known as “The Dude” who appears periodically and makes massive bets, driving the indices up. No one knows who he or she is and some suspect that the Dude is actually a computer algorithm that has been unleashed on the Turkish market to take advantage of its relatively small size which gives the trader the power to influence stock prices market-wide.
Whatever the truth of the situation, as the “trend is your friend” other regular investors have followed the Dude into the market and added to the momentum.
Turkish equity prices have also benefited from a state sponsored credit-splurge by the government in an effort to re-inflate the economy that has poured cash on the fire.
Russia is late to the party. It had a spectacular 2016, gaining 52% in the year and making it one of the best performing markets in the world. But that is Russia’s curse: it is usually either the best performing, or worst.
However, the outlook for the rest of the year is brighter. While the first quarter growth was lackadaisical, the month-on-month results are much better with the economy growth picking up to 1.4% in April and 3.4% in May as the recovery starts to build momentum. Russian stocks are so cheap now that some investors have started bottom fishing and while the overall picture is grim at the corporate level there have been some outstanding corporate stories that have seen the share value of some of the country’s best companies double in price.
As Russian consumption and construction are both back in the black in the last months after years of decline analysts are upbeat about the equity market in the second half of the year, predicting a 15-20% upside to the end of the year.