Turkish general election: Strategists and managers comment

Last Sunday’s Turkish general election has seen Turkey’s president Recep Tayyip Erdogan’s AK Party regain its majority in parliament. Strategists and managers comment the election results.

Abbas Ameli-Renani, emerging markets strategist at Amundi, said :

“This is certainly a positive development for Turkish assets in the short term as it removes uncertainty about governability in Turkey. The combination of the AKP being able to form a single-party government and the Kurdish HDP also passing the 10% threshold was the market’s best case scenario. It’s also important that the AKP did not win the 330 seats it would have needed in order put constitutional changes up for a referendum.

“Nevertheless, with 316 seats, President Erdogan is likely to try and push for an executive presidency in the more medium-term. Beyond the very positive response of Turkish assets in the short-term, the outlook remains challenging for Turkey given its still large external financing needs. The heightened political noise had also relieved some pressure from the central bank in recent months, and with that episode out of the way, we may see renewed pressure on the central bank to ease monetary policy in order to support growth. Given that inflation remains elevated, such pressure would not be favourable for Turkish assets.”

Salman Ahmed, global strategist at Lombard Odier Investment Managers, commented :

“Overnight, the Turkish election results showed an outright AKP win – a result which was considered unlikely given the recent polls. Formation of a single party government helps certainly reduce short-term market uncertainty which has been in place since June.

“However it raises the risk of further social divisions, if Erdogan uses the comprehensive win as a mandate to further his objective of a presidential system. Indeed, beyond the positive knee-jerk reaction in Turkish assets seen this morning, the longevity of the moves will be determined by how the new AKP government manages its relationship with other key institutions, specifically, the central bank.”

Erdinç Benli, Co-Head of GAM’s Global Emerging Market equities team, said :

“After losing its majority government in the June election, Turkey’s AKP party took the risk of calling a snap election and is now rewarded by being the clear winner of the November 1 election with a very high turnout of around 90%. Turkish voters took to the polls again on November 1 to cast their ballots, after the country’s June election left the government in a hung status.

“Based on the preliminary results AKP has won 49.4% of the votes and 316 seats in the 550-seat parliament. AKP can now form a single party government. Such a result was not expected and is positive for financial markets. With this result, the prior political uncertainty of a hung government – which hurt Turkish equities and the domestic currency lately – has now been alleviated and investors can focus again on fundamentals.

“Another positive from the election result is that the pro-Kurdish party HDP passed the 10% hurdle and is in the parliament. This reduces the risk of domestic conflicts and this is exactly what the voters are looking for: peace, stability and a strong government which enables economic prosperity.

“President Erdogan can still interfere in daily politics, but for the moment the presidential system cannot be implemented without the support of other parties since AKP hasn’t won the necessary 330 seats in order to hold a referendum on its own to change the constitution.

“But investors should closely eye who will be nominated for important ministerial seats in order to restore confidence and to drive the much required structural reforms that will help develop the Turkish economy. It’s also important to watch that the fiscal discipline is kept because AKP mentioned some increases in fiscal spending during its campaign.

“The new government, which should be formed quickly, can start working on structural reforms to support economic growth as well as on the security issues on its south-eastern borders.

“Overall, we believe that the outcome of the election is positive for the Turkish equities market and should support a near-term relief rally in Turkish equities. Turkish equities recently have traded at multi-year lows in US dollar terms, making them one of the largest loss-making markets this year, underperforming the overall emerging markets (EM) complex by some 15%. Investors had been  reducing their exposure to Turkey up until now,  yet the AKP win could see equities regain a lot of their lost ground.

“After the strong bounce as a reaction to the election results Turkish equities are valued with a price to earnings ratio of 9.5x for 2016 and are still trading with a discount of more than 10% versus other emerging markets and still offer upside. The built-in risk premium of political uncertainty should now drop and it’s likely we’ll see investors return to Turkey. In particular, it’s likely that the banking and real estate sector will benefit from the positive sentiment. We also believe that government-related companies which suffered lately should outperform the market.”

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