Erdogan Post-Election Market Rally Part II No Sure Thing

Traders may not be prepared to give Turkish Prime Minister Recep Tayyip Erdogan a repeat of the market rally that followed his party’s March election victory as he prepares for the presidential ballot in two days.

Investors said they will need to assess the next government’s commitment to financial stability should he assume the presidency this month. Inflation has been at least 4 percentage points higher than the central bank’s 5 percent target during the past four months as Erdogan pressured policy makers to cut borrowing costs to spur economic growth.

While bonds and the lira rallied after his party won local elections in March, sending two-year note yields down by the most in major emerging markets, there’s no guarantee of a repeat should Erdogan be victorious, said Vassilis Karatzas at Levant Partners. A reduction in regional tension and a credible government plan to boost the economy will be needed to reinvigorate the rally, according to Inanc Sozer at Odeabank AS.

“Emerging markets in general are in a more delicate position” today, Karatzas, who helps oversee $175 million as managing partner at Levant, said by phone from Athens on Aug. 6. “The most important thing is for Erdogan to let the market know how and with whom he plans to manage the economy. The market will wait and see.”

If elected, Erdogan, 60, will have to step down as leader of the Justice and Development Party, or AKP, to assume the presidency on Aug. 28. The party is required to pick a new leader at an extraordinary congress within 45 days from Erdogan’s resignation. The new party chief is then appointed to head the government by the president.

Party Pledge

“AKP’s economic policies aren’t bound to personalities,” Yasin Aktay, the ruling party’s head of foreign relations, said by phone yesterday. “It has a very strong, institutional perspective and awareness on the economy. It has never ventured into populism, so no one should be concerned.”

AKP’s internal rules also require lawmakers step down after three terms. Deputy Prime Minister Ali Babacan, now in charge of the economy, is among the ministers who will be unable to run in next year’s parliamentary elections.

“We are entering into a politically uncertain environment for the next 10 months,” Akin Tuzun, an analyst at VTB Capital, said in e-mailed comments yesterday. “Nevertheless, it is still primarily the global conditions that set the main direction of the market.”

Regional Turmoil

Conflicts in Ukraine, Iraq, Armenia and Gaza are creating risks for Turkey. The Federal Reserve is reducing stimulus, which has helped fuel gains in emerging markets.

“If the government continues to manage investor perceptions well, macro risks could be handled,” Sozer, chief economist at Odeabank in Istanbul, said by e-mail yesterday. “What’s desirable is clear: a government that would strengthen the economy and increase predictability.”

The Turkish lira appreciated for a first time in four days, strengthening 0.3 percent to 2.1604 against the dollar at 2:58 p.m. in Istanbul. Two-year note yields rose four basis points to 9.36 percent. That’s down from a peak of 11.6 percent in March.

Foreign investors sold a net $403 million of Turkish bonds in the week to Aug. 1, according to central bank data published yesterday. That’s the biggest weekly selloff since the period ended May 23.

“Everybody expects Erdogan to win,” Michel Danechi, who helps manage $1.2 billion at Armajaro Asset Management LLP, said by phone from London yesterday. “The question is who the prime minister and the people around him are going to be. We’re going to wait and see until we receive a signal.”

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