Markets gain strength as expectations rise for single-party government
by Şeyma Eraz
ISTANBULMay 15, 2015 - 12:00 am GMT+3
by Şeyma Eraz
May 15, 2015 12:00 am
The benchmark BIST 100 is up more than 15 percent, bond markets are up more than 10 percent and the dollar exchange rate is down to Turkish lira 2.59 in the last week alone. Experts say markets are pricing in a single-party government
With only three weeks left before the June 7 general elections, the Turkish lira has started gaining back some of its value and stock exchange markets are on the rise again. Experts say since election polls have strengthened the expectation that the ruling Justice and Development Party (AK Party) will continue to rule as a single party following the general elections, the markets are pricing in the single-party government and gaining confidence. According to a survey conducted last week by MAK consultancy, the AK Party is set to receive 45.1 percent of the vote and continue to rule the country as a single-party government for a fourth time.
The markets are following the process closely and rallied last week as the exchange rate lowered to TL 2.59 to the dollar and purchases continue in the stock market, which has been increasing for nine days. Bankers said the markets pricing in of the AK Party, which has been in power since December 2002 and received 49.8 percent of the vote in the last general elections in 2011, will not lose its position even if there is a decrease in its votes. Analysts say the most desirable scenario for the market is if the AK Party wins enough seats to continue to govern the country as the sole ruling party even if it cannot get enough seats to change the Constitution. According to the Constitution, a party needs 367 of the Parliament's 550 seats to directly change the Constitution, 330 seats to put forward a referendum for a constitutional amendment and 276 seats to rule as a single party.
The reversal in global dollar indices have been pointing to a weaker dollar globally for the past month. The Turkish lira has lost 14 percent of its value against the dollar since the beginning of the year and was late in joining the global domestic currency rally. Now that local concerns, namely that the AK Party may not win an outright victory in the coming election, have been eased, investors are closing short positions and returning to Turkish equity, bond and currency markets. Turkish Credit Default swaps - insurance against economic and political uncertainty - have fallen more than 10 percent in the last month, the benchmark BIST 100 is up by more than 15 percent and bond markets are up by more than 10 percent in the last week alone.
Speaking to Daily Sabah, economist and columnist Taha Meli Arvas highlighted the period leading up to the presidential elections and said investors generally wait for two or three weeks before the election before placing their bets. "In the last election, investors called the election a month before it took place and bet that Recep Tayyip Erdoğan would win, which he did. Similarly, now three weeks out, investors are betting that the AK Party will win a majority of seats and continue to govern without a coalition, and this is why markets are rallying," Arvas said. He added that profit-taking may occur as the AK Party win is seen as guaranteed, as it did in both elections last year, otherwise markets will wait for the election to take place before locking in profits.
"It's interesting to note that all the anti-AK Party pundits and columnists who blamed the government for the depreciation of the Turkish lira have nothing to say when they realize that currency moves weren't about the Turkish lira's weakness, but about global dollar strength as I've been pointing out for several months," Arvas stressed.
Atilla Yeşilada from Istanbul Analytics said investors may have already made up their minds and are suspecting the election rally has already begun. He added that until today, they have assumed that investors would be taking a short-term position on the stock market in terms of Turkish lira-denominated assets and that no rally would be attempted. However, he underlined transactions and trends observed in the Borsa Istanbul stock exchange may prove they have been wrong. "Foreign investors we have been in contact with now do not want to price in any kind of uncertainties that may occur after the general elections in Turkey. For foreign investors, scenarios in which the AK Party wins even by a slight difference are adequate. Experts and fund managers seem to have purchased the election risk and are searching for good scenarios" Yeşilada said. He also emphasized that despite the fluctuations in the American and German Government Debt Securities, Turkey, when compared to other developing markets, withstood the fluctuations better. "On Tuesday, the Treasury had no problem in borrowing, and despite the fluctuations in global stock markets, it didn't have to pay high interests," Yeşilada said.
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