Erdinç Benli, Co-Head of the Global Emerging Markets team at GAM, on the effects of the outcome of the Turkish general election…
The result of the Turkish general elections will likely profoundly change politics in the country. The strong market reaction is somewhat surprising, in particular as the polls indicated last week that the AKP would likely lose its single-party majority, and the equity market already retreated over the last two weeks.
The outcome of the elections is likely to create more volatility in the short term. Markets are now waiting for some very decisive steps, including whether a coalition building process will be successful, or if we will see early presidential elections towards the end of the year should this process fail. Apart from the party politics, it will be important to see who will become the new leader of the economy, as Ali Babacan, who has been politically responsible for the economy, has to step down after three terms.
Another big question mark for investors is if and how the Turkish central bank will react to the further depreciation of the Turkish lira, which is now trading on an all-time-low against the US dollar.
Looking at Turkish equities, valuations are now on an attractive level, having already been trading at the highest discount for the last five years. However, the current situation should not be taken as an invitation for indiscriminate investment. Careful stock selection remains key.
The longer-term outlook for Turkish equities is promising. A more mixed government should bring more consensus-based politics and therefore a better policy-making process. In particular, it allows further development of the country’s democratic structures and could attract additional investment from abroad. Furthermore, Turkey has attractive structural drivers, including its young and entrepreneurial population. For long-term investors, Turkish equities could now offer an attractive entry point.
