There's No Winning for Turkey Investors With Any Election Result

(Bloomberg) -- For investors in Turkish markets, this weekend’s election looks like a lose-lose situation.

If President Recep Tayyip Erdogan and his AK Party’s alliance with the nationalist MHP prevail, investors worry there will be more of the same policies that have roiled Turkish assets in the past year. Yet there’s no guarantee the untested opposition will offer a credible way out of economic turmoil and frayed ties with the West either.

“Turkish financial markets have tended to react positively to an Erdogan/AK Party victory as investors saw it as a sign of political stability -- but this time around the markets are likely to be more jittery,” said Jason Tuvey, an emerging-market economist at Capital Economics in London.

The difference is that a victory will allow Erdogan to create an executive presidency, giving him more clout to follow through with threats to dictate central bank policy. Just this quarter, the lira is down 17 percent against the dollar because foreign investors objected to him standing in the way of interest-rate increases needed to stave off a run on the currency.

Erdogan requires at least 50 percent of the vote to win in the first round presidential vote on June 24, otherwise he’ll be pushed into a July 8 runoff with the most popular opposition candidate, most probably Muharrem Ince of the secular Republican People’s Party, or CHP.

Even if Erdogan wins, there’s a chance the ruling AK, or Justice and Development, party alliance will lose its parliamentary majority, dragging the country into prolonged political deadlock.

For Turkish markets to calm down, investors want clarity on how the new government will spur the $880-billion economy and steer Turkey from the brink of a currency crisis. After 16 years of backing Erdogan, some are ready for a change, while others worry about stepping into the unknown.

Here’s how they’re planning to trade:

1. Erdogan presidency & AKP-MHP parliamentary majority

Nomura (Henrik Gullberg)

  • “Markets are unlikely to give him the benefit of the doubt and instead expect a continuation of the current economic policy which has resulted in a lagging and reactive central bank and, as a result, repeated episodes of sharp lira depreciation.”

TD Securities (Cristian Maggio)

  • “A positive TRY kneejerk vs USD comes as the market values ‘stability and continuity’ more than a risky change of regime. However, a change towards economic and political orthodoxy is very unlikely to follow. TRY will resume its negative trajectory as the market realizes it will get more of the same from Erdogan executive president, with full backing of parliament”
  • “Modest bull steepening in the front-end rates, but high and rising inflation will continue to exert upside pressure as more CBRT tightening could be required.”

2. Erdogan presidency / Opposition parliamentary majority

Unicredit (Dan Bucsa)

  • “We assume that this would lead to uncertainty, volatility and likely early elections”
  • “A united opposition may garner a majority of MPs, but could struggle to implement a policy agenda as long as the president has the main power levers. Thus, Mr. Erdogan’s administration could embark on a populist agenda designed to increase his approval and pave the way for the AKP’s return to power.”

Blackfriars Asset Management (Anastasia Levashova)

  • “I think there will be still some correction in equity index (say -5-10%), weaker bond yields and weaker TRY. This scenario predicts more uncertainty and market will have to price earlier (than planned) elections.”

SEB (Per Hammarlund)

  • “The market reaction will likely be negative due to the uncertainty created by the potential conflict between the president and parliament. However, the drop will likely be limited as the implied policy change will be relatively small.”
  • “Reforms and significant policy initiatives will stall, but Erdogan will likely continue to dominate the political scene.”

Amundi (Esther Law)

  • “I think there may be a very short-term tactical relief rally for the TRY, but it may be tricky for the country to push through any meaningful reforms with this combination.”

3. Opposition presidency / Opposition parliamentary majority

Medley Global Advisors (Nigel Rendell)

  • “Ince and the opposition would produce market euphoria initially. It would be the end of the era for Erdogan and the AK Party and a remarkable result. How long the positive sentiment lasted depends on whether the opposition parties can work together.”
  • “This looks tricky and to pull together, for example, a coalition that includes the HDP and IYI is difficult to see happening. Therefore, there could be a political vacuum in parliament, albeit with Ince in charge, as a much more low-level president than Erdogan.”

Capital Economics (Jason Tuvey):

  • “Investors may view this positively in so far as it could mark a shift towards more orthodox policy-making and halt the shift to an executive presidency. That said, a period of political uncertainty would ensue.”
  • “After 16 years in power, Mr. Erdogan and the AK wouldn’t go down without a fight. And the opposition parties have only come together due to their common antipathy towards the president – trying to form a strong and stable government would prove more difficult.”

4. Opposition presidency / AKP-MHP parliamentary majority

Blackfriars Asset Management (Anastasia Levashova):

  • "On president level, support will be consolidated for Erdogan and it is illogical to vote for the opposition’s candidate and then support AK Party. Market may first rally, but then will sell off as it will mean bloody fight between quite powerful new president, but still very strong AK Party and Erdogan. Very risky and investors will be observing -- not investing -- before situation will clarify."

SEB (Per Hammarlund):

  • "The market reaction will likely be strongly negative since the risk of policy paralysis would be large."

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