Turkish Stock Market Turbulence

Investors in Turkish stocks have had a wild ride in 2008. After plunging 45% in the first six months of the year, the Istanbul market surged nearly 30% in the month of July. What gives?

Turkey is a great example of the importance of understanding political risk. One of the big reasons for Turkey's extreme volatility this year had almost nothing to do with its economic or corporate fundamentals. Instead, it was a court decision.

In a nutshell, Turkish prosecutors attempted to ban the country's ruling party, the AKP. Just imagine Federal prosecutors in the U.S. arguing that the Republican Party is unconstitutional. It's a loose analogy, but you get the picture. It would have caused complete political chaos.

Instead, Turkey's highest court vote against the ban, narrowly avoiding a major crisis. Investors breathed a sigh of relief, and shares recouped some of this year's losses. The Economist.com's country briefing on Turkey goes into a lot more detail than my simple explanation here, but the message is clear. Don't ignore political risk!