Turkish Assets Lifted by Erdogan Win

Concerns over rising trade tensions weighed on emerging stocks and currencies on Monday, but Turkish assets enjoyed a relief rally after Recep Tayyip Erdogan clinched victory in a closely fought election.

Erdogan emerged victorious overnight from his biggest electoral challenge in 15 years, giving him sweeping, executive powers he has long sought and extending his grip on the nation of 81 million until at least 2023, Reuters reported.

With the vote delivering a more clear cut result than many expected, and with the immediate prospect of fresh elections averted, Turkey’s lira strengthened 1.6%, local benchmark bond yields slipped and many dollar-denominated issues gained ground.

Turkish markets have been under pressure in recent months, with investors concerned over double digit inflation, large external financing needs and Erdogan’s pressure on the central bank for lower interest rates. The lira has weakened more than 17% since the start of the year.

“With this result Turkish markets should enjoy a small relief rally given that the political uncertainty has now been removed,” said Paul Greer, portfolio manager at Fidelity.

“However, the medium to long-term picture for Turkey remains challenging and the much required deep structural reforms are now unlikely to materialize anytime soon.”

Erdogan promised before the election to exert a tighter grip on monetary policy.

The main BIST 100 stock index jumped 2.2% to 97,964 points, having opened more than 3.5% higher. The 10-year benchmark bond yield fell to 16.07% from Friday’s 16.29%, while the two-year yield fell to 18.84% from 19.18%.

Turkey’s dollar-denominated bonds maturing 2022 and beyond gained, with the 2040 issue chalking up its biggest daily gains since 2013.

Erdogan took 52.5% of the vote in the presidential race, with more than 99% of votes counted. His Justice and Development Party took 42.5% in the parliamentary election and its nationalist allies beat expectations with 11.1%, giving their alliance a legislative majority.

Investors welcomed the prospect of a stable working relationship between the president and the new parliament, although concerns remained over Erdogan’s policy promise.

Meanwhile, the more urgent problem for Erdogan is Turkey’s debt-burdened economy; the Turkish lira has lost more than a fifth of its value this year against the US dollar.

“He is now free to pursue an even more populist economic agenda, which could accelerate the economic crisis in years to come,” said Hukara, from Chatham House. “It means supply gargantuan amounts of cheap consumer credit and loosening the purse strings for mega public construction projects.”