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Election win puts lira on course to outperform rand

Istanbul - Turkey’s lira surged with stocks and bonds after the political party President Recep Tayyip Erdogan co-founded swept back into office in the second parliamentary vote this year, ending months of political deadlock.

The lira jumped 4% to 2.8018 against the dollar at 12:34 in Istanbul, the biggest advance among more than 150 currencies tracked by Bloomberg globally. The Borsa Istanbul 100 Index soared the most in almost two years and the government’s 10-year bonds advanced, with its yield plummeting to the lowest in more than three months.

Societe Generale SA sees the lira climbing another 3% to 2.72 per dollar, its 200-day moving average, on optimism over AK Party’s win and Ecstra, an emerging- markets consultancy, sees stocks rising as much as 15% in dollar terms.

"Although unexpected, AK Party’s victory may be the optimal election outcome for near-term economic and asset dynamics in Turkey," Roxana Hulea, a London-based strategist at Societe Generale, said in an emailed note. The "sweeping win and the resulting fast-track - and long overdue - formation of a stable government could" lead to an outperformance of the lira "relative to its high yielding peers, notably the South African rand," she said.

The AK Party’s win heralds the end of a political standstill that began in June, when it lost its majority for the first time since 2002. In the months that followed, coalition talks between parties collapsed and uncertainty over who would run the $720bn economy made Turkish assets even more vulnerable to a selloff across emerging markets, pushing the lira to a record low against the dollar and the yield on the government’s two-year debt to the highest in six years.

Sweeping win

The Islamist-rooted AK Party took about 49% of the vote and probably won 317 seats in the 550-member legislature with all ballots counted, according to official news agency Anadolu. The results are not yet official. The pro-Kurdish Peoples’ Democratic Party, or HDP, looked set to win the 10% of the vote it needs to gain parliamentary representation, diminishing the risk of increased tension between the government and Kurds.

HDP meeting the "seat threshold should minimise mass violence even if they have minimal power", Ecstrat’s London- based strategist Emad Mostaque said by email.

The lira rose the most since 2008 on a closing basis and the yield on Turkey’s 10-year bonds fell 44 basis points to 9.33%. The Borsa Istanbul 100 Index increased 5.6% at the midday break led by the advance in Akbank TAS and Turkiye Garanti Bankasi AS, Turkey’s largest listed lenders. The nation’s banking index soared the most in more than two years.

Erdogan rules

The result extends the AK Party’s 13-year rule and could reignite the debate over constitutional changes that would lead to a government run by the president. The party needs at least 330 seats in parliament to call a referendum on the matter. Turkey’s political parties should work together to scrap the “coup constitution” and draft a more democratic charter, Prime Minister Ahmet Davutoglu said at an election victory speech in Ankara.

Erdogan and his loyalists may also resume pressuring the central bank to keep interest rates low, even as inflation misses the regulator’s target - an example of the centraliaation of power that could send investors fleeing from Turkish assets, according to Cristian Maggio, the London-based head of emerging-markets research at Toronto Dominion Bank.

There "is a high probability of big changes here in terms of re-writing the constitution and centralisation of power in Erdogan’s hands", Luis Costa, the chief fixed-income strategist for Central and Eastern Europe, the Middle East and Africa at Citigroup in London, said by phone.

"President Erdogan will not stop here, this opens the gates for very important and market-challenging political decisions,” Costa said.

Stock decliners

Concern over the implications of AK Party’s win for companies associated with Erdogan’s foes sent some stocks tumbling. Shares of three publicly-listed companies of Koza-Ipek Holding AS, which faced police raids last week and whose management has been seized by authorities, plunged.

Koza Anadolu Metal Madencilik Isletmeleri AS, Ipek Dogal Enerji Kaynaklari Arastirma Ve Uretim AS and Koza Altin Isletmeleri AS were among biggest decliners on Monday. Koza-Ipek is accused of financing US-based Islamic preacher Fethullah Gulen, a former Erdogan ally who was declared the leader of a terrorist organisation following a 2013 corruption probe that Erdogan blamed on Gulen’s followers and declared a coup attempt.

Dogan Sirketler Grubu Holding AS’s stock also declined. Erdogan accused Dogan’s honorary chairperson Aydin Dogan of building a "life on lies."

The four companies were the only decliners out of the index’s 100 stocks, with losses ranging from 9.7% to 15%.

Turkey’s economy

The AK Party’s victory also means markets will start focusing on what reform packages the government will bring and what the new economy team will look like, Selim Yazici, the chief executive officer of money manager Teb Portfoy Yonetimi AS in Istanbul, said by phone.

“For a long time, all we’ve been talking about was politics," Yazici said. “Now we can focus again on the economy.”

While some of Turkey’s recent economic woes have been blamed on political uncertainty, the economy has been slowing for some time. It grew an average of more than 6% a year during the first half of the AK Party’s time in government, but that slowed to about 3% in the second half. The government has failed to reach its growth target every year since 2012.

Still, “the market is relieved to see the country won’t go over the same period of political bickering as it did following the June 7 elections”, Alp Serbetli, a currency trader at Istanbul-based Anadolubank AS, said by email. “Single-party rule eliminates political risks at least in the short term, and it’s possible to test 2.60-2.65 levels in lira against the dollar."

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