Investors are, frankly, a bit frightened by Turkish politics right now.
Not only is it unclear what the result of June’s parliamentary election will be, but they can’t even figure out which outcome to root for. While investors have long supported the incumbent Justice and Development (AK) Party, they’re less sure now after witnessing months of central bank bashing by President Recep Tayyip Erdogan and officials loyal to him.
What's more, Deputy Prime Minister Ali Babacan — one of the architects of the country's decade-long economic boom — is poised to leave office after the vote.
Some opinion polls show the main pro-Kurdish party, the People’s Democratic Party, has enough of the vote to enter parliament, possibly diminishing the 13 years of single-party rule that enabled the AK Party to govern on its own.
Not sure what to make of any of this, investors are selling: Both the Turkish lira and the bond market are the worst performers among developing countries in 2015.
There is a “confused political landscape” that’s spurring the selloff in Turkish assets, Cristian Maggio, head of emerging-market research at Toronto Dominion Bank, said by e-mail on Wednesday.
Bernd Berg, the director of emerging-markets strategy at Société Générale SA in London, predicts the decline of the lira past 2.7 to the dollar could be the beginning of a “full-blown currency crisis,” something he blames on “continuous interference of leading politicians in central bank policy and disagreements about the right economic strategy.”
The lira, bonds and stocks all underscore the tension:
Implied volatility on three-month lira options is higher than on one-year contracts for the second time in a year.
“Political uncertainty and weak domestic fundamentals have been the main trigger for the under-performance of the lira against its peers in 2015,” Berg of SocGen said.
Turkish bonds have fallen the most among developing nations in 2015, with the yield on the five-year note rising to a six-month high.
“Turkey has been driven much more by political factors, by the onset of the election and the concerns about the lira in general,” Julian Mayo, co-chief investment officer at Charlemagne Capital Ltd., which has $2.3 billion in developing-market assets, said in an interview in London on Wednesday.
Two-year yields are near the highest relative to 10-year rates in more than a year.
“The market is expecting the funding costs to remain high, with such levels of currency volatility,” Evren Kirikoglu, a strategist at Akbank in Istanbul, said by e-mail on Thursday. “We can also read the yield curve as pricing low growth prospects.”
Sixty-day price swings on the benchmark stock index, 3.6 percent lower this year, are near a one-year high.
“Volatility is about as high as it’s going to get,” Mayo of Charlemagne said. ‘The thing about Turkey is that it’s a cyclical sort of market. It either does very well or does very badly.’’
—With assistance from Maria Levitov in London.
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