(Bloomberg) -- Things were looking up for Turkey when investors went home on Friday afternoon.
Markets were rallying around the world on speculation global monetary policy was going to remain loose, there was a lull in the country’s fractious politics and President Recep Tayyip Erdogan’s government was moving to normalize relations with Russia and Israel.
Now, after an attempted military coup that erupted at about 10 p.m. that evening in Ankara and Istanbul, sending the lira into its sharpest nosedive in about eight years, those investors are waking to a very different world, steeling themselves for tumultuous trading as local markets open on Monday. The currency rebounded 2.2 percent to 2.9510 per dollar at 8:47 a.m. in Istanbul Monday, after closing last week at 3.0157 per dollar, about 2 percent away from a record low in September.
“Political risk was always in my mind, but even I went ice-cold when I saw the news” of the coup attempt, Burak Cetinceker, a fund manager at Strateji Portfoy in Istanbul, said in an interview Saturday. “I don’t think I would rush into Turkish markets in the short term if I were a foreign investor.”
The failed takeover, in which about 200 people died, was the culmination of a worsening political backdrop partly fueled by Erdogan’s efforts to invest the presidency with increased powers while combating an upsurge in terrorist attacks blamed on Islamists and Kurdish separatists. The fighting that began Friday came less than three weeks after bombings at Ataturk Airport in Istanbul left more than 40 people dead, the latest in a series of deadly attacks in towns and cities across the country.
As confusion reigned Friday over whether the coup had succeeded, stocks around the world retreated and U.S. Treasuries advanced, while the lira tumbled 4.6 percent, its biggest decline since 2008.
Though Turkey’s currency is likely to recover some of those losses now the violence has dissipated, longer-term investors may be more circumspect about investing in the nation’s assets as Erdogan seeks to root out opponents, detaining thousands of people, including army officers and judges.
“The almost instant issuance of arrest warrants for thousands of members of the Turkish judiciary raises questions about the coup itself,” said Gary Greenberg, an emerging-markets manager at Hermes Asset Management in London, which manages $2.5 billion, including Turkish equities. “Although the knee-jerk reaction of the market on Monday might be one of relief, it is hard to feel entirely sure that democracy in Turkey is on firmer footing.”
Foreigners this year poured a net $7.3 billion into Turkish assets through May, after $3.2 billion of outflows in the same period a year earlier, data released by the central bank last week showed.
The recent pickup in foreign flows into Turkey “will now surely reverse, causing inevitable market distress,” Michael Howell, the managing director of CrossBorder Capital in London, said in an e-mail Saturday.
All of which threatens to unravel gains that have made Turkey one of the biggest beneficiaries of the global clamor for risk as central banks pump cash into the biggest economies. The Borsa Istanbul Index has climbed 15 percent this year, while the yield on Turkish five-year local bonds has dropped more than every other emerging-market nation except Brazil. The country’s five-year credit default swaps, the cost of protecting debt against default, fell to the lowest in a year last week.
For Peter Schottmueller, the head of emerging-market and international fixed income at Deka Investment GmbH in Frankfurt, investors will focus more on the stability Erdogan can bring back than the crackdown against his opponents.
“Maybe you and I prefer a more democratic government, but to the markets, it’s not relevant,” he said. “I’d be reluctant to sell on Monday.”
The rally in Turkish assets has come amid a slowing of inflation and easing of global liquidity that’s supported the currency and allowed the central bank to lower the overnight-lending rate by 175 basis points this year. Policy makers said Sunday they will provide unlimited liquidity to banks.
“This political turmoil will clearly have a significant negative effect on the economy,” Naz Masraff, an analyst at political risk consultants Eurasia Group, wrote in a report Saturday. “With an attempted coup of this scale, investors already cautious due to past crises will be even more skeptical about Turkey’s business environment and the government’s ability to maintain macroeconomic stability. The struggling tourism sector will also take another hit.”
The central bank is scheduled to hold a policy meeting Tuesday. As of Friday, the median estimate of economists surveyed by Bloomberg was for a further 50-basis-point reduction in the overnight-lending rate.
What policy makers decide now will depend on perceptions of Turkey’s default risk and short-term interest-rate expectations when trading starts on Monday, according to Evren Kirikoglu, a strategist in Istanbul at Akbank TAS, one of Turkey’s largest listed lenders.
In a sign of the strain likely to be felt by some borrowers, Turkey’s Sekerbank TAS on Sunday postponed meetings it planned to hold with international investors ahead of a possible bond sale. It will reschedule the roadshow at an appropriate time, according to the banks hired to manage the offering.
“I’m not going to be an optimist for the rest of the month,” Strateji Portfoy’s Cetinceker said. “There is also global uncertainty, which may intensify the negative impact of the current risks in domestic politics.”