Doug
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Highlights: * On Saturday, the Turkish Parliament narrowly rejected a motion that would have allowed the deployment of American combat troops for a possible war against Iraq. * The Parliament is due to reconvene on Tuesday, but as of yet it is not clear when or even if the government will seek a second vote. Public opposition to war makes a second vote prior to this weekend's by elections (in which AK leader Erdogan is standing) rather risky. * In our view, the unexpected decision marks a potentially significant setback both for the AKP government and the country. The Parliament's decision threatens to deprive Turkey of the much-needed multi-billion dollar US aid package that would have cushioned the Turkish economy from the impact of a war against Iraq. * Even with the prospective aid, interest rates remained, in our view, unsustainably high as the apparently strong majority government had yet to win the confidence of the markets. The failure of the AK party leadership on such a crucial issue will only reinforce market concerns. * Unless this vote is reversed quickly, the lack of investor confidence in the government and already poor consumer sentiment threatens the prospects for broader based economic recovery, whilst strained relations with the US would also have obvious strategic implications. Most importantly, debt sustainability will become a serious concern. * Our overweight stance on the market reflected prospects for the aid package, an associated IMF agreement and broader-based economic recovery post Iraq. Unless the vote is reversed quickly, this investment case is undermined. * Short term, we downgrade our country weighting to Neutral. The future just got a lot more uncertain. To retain an overweight would imply a very high degree of conviction that a second vote will be held quickly and with a different result, which we can no longer say we have. Moreover, the government is now going to have to work twice as hard to repair its reputation with investors. * Offsetting the Turkish downgrade, we boost our overweight in South Africa. We remain overweight EMEA within a GEM context.