With the final votes counted, Presidentelect Erdoğan's election victory was made official, ushering in a new era of Turkish politics. Financial markets continued to realize gains after the recent run-up to both equity and debt markets, which led to a drop in prices of equities across the board, while debt markets are unchanged since the election. I had predicted that investors would, as they have done for the last three election cycles, "buy the rumor, sell the news," and that is exactly what happened with investors locking in profits in equity markets. The "sell in May, go away" interpretation of summer drops in equity markets began later this year with Ramadan and the presidential election bisecting the summer holidays.
Turkish Financial news in the last week, however, was not all about risk-off, with international investors easing off credit default swaps. Credit defaults swaps, or CDSs, are instruments that insure bonds against default and are a great market-based measure of political and economic uncertainty. Apparently markets believe that Presidentelect Erdoğan's election will be good for stability and the economy of Turkey. CDSs had traded at 2.03percent prior to the election and are down over 8percent trading at 1.84percent midday Monday. In comparison, Eurozone and EU member Portugal's CDSs trade at 1.81 percent despite an implicit guarantee by the ECB on its debt.
The Turkish Lira remains at 2.17 liras to the dollar, unchanged since the last trading-day before the presidential election. The lira had gained strength against the dollar after President-elect Erdoğan's win was announced, but continued trouble in Iraq in isolating ISIS appears to be the reason why the dollar has gained strength, as investors traditionally turn to the dollar in times of armed conflict. Disruption of trade with the KRG (Kurdistan Regional Government) including a slowing of oil imports from the region, weighed on lira trading, as Turkey is heavily dependent on foreign oil imports for energy.
Equity markets saw profit-taking across the board in the last week, however, the benchmark BIST-100 started the week up over 400 points at midday Monday, trading at 77, 104 points. As I had predicted markets that were up over 23,000 points in the past five months, gave back six thousand points on profit-taking.
Many apparently anti-Turkey "impartial" news services, such as Bloomberg, continue to report that this drop is in response to Prime Minister Erdoğan becoming President-elect, however, equity markets rallied over 25 percent while polls simultaneously showed Erdoğan to be the favorite among the candidate pool. Had there been a surprise in the polls followed by a drop in markets, such an argument would have made sense, but such reporting is bad-faith journalism at its worst unfortunately.
Bond markets are unchanged since the last trading day before the election with the benchmark two-year bond trading at yields of 9.19 percent and the longend 10-year issue trading at 9.31 percent. The two-year bond is actually trading higher by 2 basis points while the 10-year is trading lower by 1 basis points with their respective yields changed from their previous levels of 9.21 percent and 9.30 percent. These yields show that markets had priced-in an Erdoğan victory and any post-election movements in price are now based on changing global dynamics. The Central Registry Agency's (MKK) "Foreign Participation in Turkish Equity Markets" index is also nearly unchanged in the post-election period as foreign ownership of Turkish equities stands at 63.64 percent, down from the preelection level of 64.08 percent. Such a miniscule drop during a period where the BIST-100 saw profit-taking of over 8 percent points to the selling being mostly domestic.
Historically the average Turkish investor holds onto equities for approximately one month, whereas the average foreign investor invests for approximately 13 months. Therefore, foreign investors continue to believe in the profit potential of Turkish equities. Limited U.S. involvement in Iraq to combat ISIS may be a signal of broadening involvement to come, however, the longer it takes the U.S. to help the Kurds in the north, the more U.S. interests will be hurt and along with it, NATO-ally Turkey. Markets shrugged off warnings from Moody's late last week as CDS levels continued to come down. I predict that the recent drop in CDS rates will be an indication of continued investment in Turkey and following the announcement of the new Prime Ministed in two-weeks' time, markets should continue to climb in the Fall.