25 June 2018
Turkey’s political landscape looks set to remain unchanged following the early elections on 24 June. In the presidential vote, Erdogan won in the first round, securing just over half of the votes, thereby avoiding a second round run-off on 8 July. In the parliamentary elections, the incumbent AKP/MHP coalition alliance retained their majority in the 600-seat assembly.
Following his victory in the April 2017 constitutional reform referendum, President Erdogan has now successfully consolidated his political power with the role of prime minister effectively scrapped and the presidency shifting from a largely ceremonial role to one that enjoys executive powers.
Many of Turkey’s opposition supporters have become frustrated with Erdogan’s pro-Islamist agenda in recent years, which has been seen as a shift away from Turkey’s long held religious secularism. Erdogan’s heavy crackdown on perceived ‘Gulenists’ following the July 2016 failed coup attempt has also had a mixed reaction from the population. In addition, the increased cost of living in recent months has weighed on Erdogan’s support given elevated inflation and sharp weakness in the lira.
However the most popular politician in the country for the past 15 years has extended his long track record of successfully navigating elections. Erdogan’s growth and job creation oriented policies have once again reaped benefits at the ballot box.
Some investors will fear this result will reduce the checks and balances on President Erdogan and further undermine the strength of Turkey’s institutions. However, the Erdogan/AKP victory does avoid the worst case scenario for Turkey where the presidential and parliamentary votes went different ways. That could have signalled a period of deep political instability with policy paralysis and ineffective decision making between the president and the parliament and even the possibility of another early parliamentary election. All eyes will now be on Erdogan’s appointment of ministers and markets will be watching closely if pragmatic reformists are appointed.
With this result, Turkish markets should enjoy a small relief rally given that the political uncertainty has now been removed. However, the medium to long-term picture for Turkey remains challenging and the much-required deep structural reforms are now unlikely to materialise anytime soon. Turkey continues to struggle with many macro vulnerabilities including persistent double digit inflation, a wide current account deficit, a low savings ratio, loosening fiscal policy and a large external financing requirement.
Away from Turkey, the near-term outlook for emerging markets remains challenging as Federal Reserve/ECB balance sheet reduction and liquidity withdrawal will continue for the foreseeable future. Additionally, we feel emerging market currencies are likely to remain under pressure as the US dollar continues to benefit from favourable interest rate differentials, structural market positioning and US tax reforms. Furthermore, emerging markets are also now facing additional headwinds from slowing growth momentum, rising inflation and global trade protectionism.
The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a reliable indicator of future results.
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