Dehn has previously said that Turkey looked to be the most ‘at risk’ of all emerging markets, but believes the near-term political outlook for Turkey looks substantially better following Erdogan’s decisive victory.
He said: “This removes, for the foreseeable future, the potential threat of lawsuits and other legal measures against senior government officials and thus stabilises the overall political environment considerably. AKP’s victory will also strengthen President Erdogan’s power within the AKP.”
The Turkish lira rose around 5% as markets opened following the election result. The Borsa Istanbul 100 Index also bounced on the news.
Dehn added: The election outcome is likely to reduce the near-term uncertainty surrounding the political outlook. However, Erdogan’s election strategy has left the political environment in Turkey highly polarised, so some mending of fences may now be required, particularly as pertains to relations with Turkey’s Kurdish minority. Markets will now be intensely focused on who gets the nod to run the economy and whether long-promised economic reforms will receive fresh momentum.”
Abbas Ameli-Renani, emerging markets strategist at Amundi says Turkey still has a number of problems to resolve: “This is certainly a positive development for Turkish assets in the short term as it removes uncertainty about governability in Turkey…. 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.”
Turkey tends to be a relatively small portion of global emerging markets funds. However, for Emerging Europe-specialist funds, its relative performance will be significant. The Baring Emerging Europe investment trust, for example, has 24.9% in Turkey, while the BlackRock Emerging Europe investment trust has 21.8% in Turkey.
