Commentary from Charlemagne Capital
Charlemagne Capital is subadvisor to the U.S. Global Investors Eastern European Fund, which invests in Turkey and other Eastern European countries. This commentary was adapted from a research update issued this week.

The Turkish Constitutional Court has, in a surprisingly timely fashion, delivered its verdict in the case against the ruling AK Party (AKP) and its leading politicians, who had been accused of threatening the secular basis of the nation.

The AKP has not been banned. Neither have its leaders, who include Prime Minister Recep Tayyip Erdogan and President Abdullah Gul. Although the court plainly found some merit in the case, it could not muster a sufficient majority to implement a ban. The only censure was an effective fine for the AKP, equivalent to around $20 million.

Therefore, there will be no new elections. The AKP need not reinvent itself under another name, and the question of whether its leaders can stand as independents simply does not arise. At the same time, the AKP has been reminded that it does not have carte blanche to reinvent the constitution, and Erdogan has responded in a typically conciliatory fashion, stressing the need for all parties to work together for the good of the country. Turkey is now free to continue its program of economic reform, and the goal of European Union membership remains very much alive.

It is difficult to imagine a more favorable outcome for Turkey and its financial markets.

Although the Istanbul stock market has been strong in recent days as a favorable outcome to the case—though not necessarily one quite so favorable as this—has become generally accepted, it remains undervalued by most yardsticks. It has fallen further than other European markets so far this year and still trades on a single-figure prospective earnings multiple, with earnings growth estimates no doubt now likely to be revised higher.

The short term may prove volatile as traders “sell the fact” having “bought the rumor,” but over the medium to longer term, it is difficult to be anything other than wholly optimistic for Turkish shares. Economic reform is back on track, and Turkey’s progress from a European outlier with a boom-and-bust economy to a major regional center of activity and stability now seems assured.

Such an outcome has yet to be priced into the Istanbul stock market, offering the prospect of some attractive returns for the long-term investor over the period ahead.

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