Turkish Assets Ignore Global Market Slide on Coalition Optimism

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Turkish stocks rallied the most in emerging markets and bonds gained as the country’s ruling parties agreed to press ahead with talks to form a coalition government, potentially averting the need for fresh elections.

The Borsa Istanbul 100 Index climbed 2.9 percent after a spokesman for the ruling AK Party said yesterday that negotiations would continue on Thursday or Friday. Yields on the nation’s 10-year notes fell 11 basis points to 9.61 percent. The currency jumped as much as 0.7 percent, the most in three weeks, before paring its gains.

The failure of Turkish politicians to form a government more than two months after elections has damped investor perceptions of the $800 billion economy, along with mounting security risks and prospects for higher U.S. interest rates. Turkish stocks, which are trading at near the cheapest valuations in almost 17 months, climbed today even as the biggest slide in China’s yuan since 1994 sent emerging-market equities toward a bear market.

“There’s a huge opportunity for Turkey to decouple from emerging-market woes if it gets its house in order,” Murat Gulkan, the managing director at money manager Unlu Portfoy Yonetim AS in Istanbul, said by e-mail. “If Turkey can put together a governing coalition with a reform agenda, the next four years could be huge. I would say the odds of a coalition have risen markedly.”

Political risks aside, Turkey is benefiting from the slump in oil prices because it imports more than 90 percent of its crude. The country’s balance-of-payments shortfall shrank less than expected to $3.36 billion in June from $4.17 billion a year earlier, the central bank said in a statement on Tuesday.

Cautious Stance

The lira was little changed at 2.7793 against the dollar at 6:49 p.m. in Istanbul, trimming its losses this year to 16 percent, the worst performer in emerging markets outside of Latin America.

The AK Party, from which President Recep Tayyip Erdogan hails, will hold discussions with the Republican People’s Party, or CHP, the spokesman for AK Party’s delegation, Omer Celik, said at a press conference in Ankara on Monday. The AK Party lost its 13-year-old majority in parliament in June 7 presidential elections.

Turkey is more reliant on capital inflows than many countries because of the size of its current-account deficit, making it among the most vulnerable economies to the Federal Reserve’s first interest-rate increase since 2006.

“The outcome of yesterday’s meeting suggests to us that the likelihood of an agreement is probably higher than the market expectations,” Citigroup analysts Ilker Domac and Gultekin Isiklar wrote in an e-mailed report. “Under current circumstances and given the markets’ cautious stance, a grand coalition, if it materializes, could bode well for the performance of Turkish assets in the near term.”

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