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April 6, 2017

The Market Sentimentalist: Turkey’s Referendum – Win Or Lose?

by Amareos.

With UK Prime Minister having triggered Article 50, the starting gun on the two-year negotiation process precipitated by last June’s surprise Brexit vote has been fired. Even though the European Council President, Donald Tusk, published draft Brexit guidelines within 48 hours of receiving the official letter signed by PM May [1], investors can look forward (irony intended) to many months of uncertainty. As has been repeatedly stated, the final deal will be the result of hard negotiations and hence will be necessarily opaque for some considerable time (a viewpoint we outlined in a recent Market Insight [2]).

Given how extremely messy and divisive this democratic tool tends to be (compared with the standard parliamentary representation model), and the alarming propensity of electorates not to deliver the “correct” [3] outcome – the UK vote being just a recent reminder of this – one would think there would be reluctance on the part of politicians to deploy it. However, if anything, the opposite seems to be true. Referendums [4] seem to be all the rage at the moment.

SNP leader Nicola Sturgeon last week managed to secure the support of the majority of the Scottish parliament for a second independence referendum, which she would like to hold just prior to the expiration of the two-year Brexit negotiation deadline; a timeline that Teresa May, whose backing is required to hold the vote, does not agree with for well-considered reasons (see aforementioned Market Insight).

More immediately, Turkey’s electorate is being asked to vote via referendum on 18 wide-ranging constitutional reforms on April 16, which would see the office of Prime Minister abolished giving President Erdogan greater executive authority. The proposed legislative changes, essentially moving to a presidential system, have been floating around Turkish political circles for over a decade and, on the face of it, streamlining a constitutional process enacted during the military junta in the early 1980s seems justified.

However, there is concern that the reforms constitute just another mechanism for Erdogan to consolidate his authoritarian rule over the country. If passed, for example, Erdogan would not only be able to appoint ministers, set the fiscal budget and nominate senior judges, he would have sole authority to announce a state of emergency and dismiss parliament and could, potentially, remain in office for a further 12 years.

Having faced an attempted coup last July, and given the political instability in neighbouring countries especially Syria, Erdogan argues that the country requires strong leadership. This may be true, but what many fear is that under the proposed changes Erdogan, who has already used strong-hand tactics with the help of an increasingly compliant judiciary resulting in 100s of journalists being detained and state take overs of media outlets in the period since, will gravely undermine democracy in Turkey.

This is certainly a major source of concern for EU political leaders who consider that the direction Erdogan has been taking Turkey over recent years is contrary to their long standing accession goal. Indeed, tensions between the two have spiked in recent weeks following German and Dutch decisions to block official Yes campaign rallies targeting the large Turkish diaspora for “security reasons”. Actions that led Erdogan to accuse them of impeding free speech and threaten to reassess the 2015 refuge deal struck with the EU to limit the numbers of refugees arriving in Greece in exchange for EUR 3bn in financial aid.

Notwithstanding such concerns, and the potential negative implications for economic growth over the long-run, the majority view of analysts is that if the Yes camp wins and political power is consolidated with Erdogan this will be the most market friendly outcome.

In the wake of last year’s escalation in geopolitical tension, the number of tourists visiting the country nosedived generating a significant economic downdraft [5]. More recently, however, public pessimism towards the Turkish economy has abated – see exhibit below – a trend that may be jeopardized if the referendum fails to deliver the “correct” result for Erdogan.

Exhibit 1: Turkey – Crowd-sourced Economic Growth Sentiment


This is because he is almost certain to pursue the same constitutional reforms via an alternative route. Most likely by calling snap elections in the hope of displacing opposition parties and then securing constitutional reform via parliamentary approval. Under this scenario, political uncertainty, and very possibly social unrest, in Turkey will rise markedly – never a happy mix for investors to contend with.

Looking at the history of Turkish referendums, of the six held since the 1961 constitutional vote only one has been rejected by the electorate (the 1988 vote on holding early elections). Hence, one would be tempted to assume that the Yes camp would be well ahead in the polls. Yet, as is the way with referendum polls of late, the two sides are close with the No camp just ahead [6] with a slim one or two point lead. Moreover, given the high level of undecided voters, estimated to be anywhere between 10-17 percentage points, like last year’s Brexit referendum the outcome is highly uncertain.

As we demonstrated with great effect in previous political votes, be they referendums or elections [7], crowd-sourced sentiments (especially the government anger indicator), can provide valuable additional insights for market participants, especially when the polls are less than conclusive.

At this point it is important to mention that the crowd-sourced sentiment indicators are only English-language based, meaning we do not directly pick-up the sentiment of online media posted in Turkish (we can if they are subsequently translated into English). Moreover, one also needs to bear in mind the greater control the Turkish government has over its domestic media as mentioned above.

That being said, the government anger sentiment indicator captured the mood of the Turkish populace during the May-June 2013 mass protests. It also captured the rising negativity towards the government in the months preceding the attempted military coup when Erdogan’s son, Bilal, was under investigation by the Italian authorities for money laundering boosting the perception that corruption in Turkey remains widespread [8] – see exhibit below.

Exhibit 2: Turkey – Crowd-sourced Government Anger Sentiment By Media Type


With these caveats in mind, it is clear that crowd anger towards the Turkish government has risen over recent weeks; a trend markedly more pronounced in social than mainstream media that may well be reflective of government influence on the latter. This increased negativity is a warning that the status quo outcome that investors are hoping for may have a lower probability than suggested by the closeness of the latest polls.

Against this backdrop the TRY appears vulnerable. As we noted in the first Market Insight published in 2017, negative sentiment towards the Turkish currency witnessed at the time indicated that,

“market conditions are being created for a short squeeze in the TRY at some stage during 2017”.

When we wrote that piece, momentum of sentiment towards the TRY was still negative leading us to conclude that such a reversal was not imminent and indeed, the currency continued to slide over the next month, declining a further 7%. However, as shown in the exhibit below, crowd sentiment bottomed in early February and has since rebounded smartly and is now into positive territory (orange bars).

Exhibit 3: Crowd-sourced Sentiments – TRY


Current sentiment readings for the TRY are far from extreme [9]. Nevertheless, as can be seen from the black line, there has been a recent uptick in the TRY’s Fear sentiment indicator (note the inverted scale) which can act as a useful indicator as to how the crowd’s perceptions towards the asset price in question – in this case the currency – will evolve in the future. When combined with the rise in government anger, it suggests that the rebound in the TRY seen over recent weeks may well have run its course, at least until the referendum result is known.

Sentiment Analytics are based on MarketPsych indices


[1] Somewhat incredulously, the details of the handover process between the UK’s top diplomat, Sir Tim Barrow, and EU President, Donald Tusk, were kept secret amid fears that pro-Remainers would seek to intercept the letter.

[2] See:

[3] Correct in the sense of delivering the result desired by those tabling the referendum – think Danish voters rejecting the Maastricht Treaty in 1992, Irish voters rejecting the Lisbon Treaty in 2008, Scottish voters rejecting independence in 2014 and Italian voters rejecting Renzi’s constitutional reform last December etc.

[4] This is not a typo or sloppy grammar on our part. According to the Oxford English Dictionary referendums is the preferred plural form of referendum not referenda as many assume given its Latin root.

[5] Tourism is a key sector for the Turkish economy accounting for 13% of GDP.

[6] Polls conducted earlier this year had the No camp well in front allegedly prompting Erdogan to call for them to no longer be published.

[7] The British and Italian referendums and the US and Dutch elections.

[8] Perceptions reinforced this week as the deputy CEO of the state-controlled Halkbank was arrested by US authorities for allegedly helping Iran evade US sanctions; news that sent shares in the bank down more almost 20%. NB: We are still investigating the sentiment spike in December 2014.

[9] As outlined in an earlier Market Insight extreme sentiment readings, indicative of a low degree of diversification of opinion, invalidate one of the prerequisites for the predictive power of the many to be superior to the few – a concept we label “crowd fail” – see:

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