Markets applaud Turkey's election results amid a return to prosperity

Published 03.11.2015 02:23

Financial markets rallied broadly on Monday following a landslide victory by the incumbent Justice and Development Party (AK Party) on Sunday. The AK Party ended up garnering 49.5 percent of the vote and 317 of the 550 seats in Parliament, allowing it to comfortably form a single-party government in the coming days. Markets applauded this outcome with the Turkish lira appreciating sharply against global currencies, making Monday the single best day for the national currency since the 2008 economic crisis.

Following the June 7 elections, Turkey was mired in a state of gridlock. At the time, the losing parties refused to join the AK Party in a coalition - who had also won the most votes in that election - while simultaneously refusing to form a coalition among themselves. The voters punished these parties on Sunday, especially the Nationalist Movement Party (MHP), who lost half of their seats in Parliament in Sunday's election. The Peoples' Democratic Party (HDP), the least popular party to enter Parliament following the June 7 election, also paid a heavy toll at the polls on Sunday. Widely believed to be the political wing of the Kurdish-separatist PKK terror group, voters took the HDP to task for its roll in inciting terror and violence throughout Turkey following the previous election. The HDP lost 21 seats, falling from 80 seats to 59, and barely staying above the 10 percent threshold necessary to enter parliament, winning only 10.75 percent of the popular vote.

The main opposition party, the Republican People's Party (CHP), also failed to win a plurality or majority in the Parliament, now its 17th straight loss in the parliamentary elections. The last time the CHP was able to win a majority in parliament was when all other parties were outlawed more than 65 years ago. The current CHP leadership has lost 11 straight national elections now with no sign of admonishment from the party faithful. CHP Chairman Kemal Kılıçdaroğlu actually declared "victory" as his party increased its share of the vote from 24.95 percent on June 7 to 25.3 percent on Sunday. With no intent on ever gaining the support of the country, the CHP continues to be content with opposing the vast majority of Turkey's electorate as it has since the inception of the Republic.

The benchmark BIST 100 equity index rallied throughout the day Monday, jumping more than 4,000 points at the open, and continued to be resilient during the second session of trading into the afternoon - sitting at 83,500 points late Monday. A 5 percent jump for the Borsa Istanbul stock exchange is especially noteworthy as Turkish equities have a 10 percent circuit-breaker in which trading stops should a security gain more than 10 percent in one of the two trading sessions the exchange has per day.

Fixed-income securities also rallied as both the benchmark two-year government bond and long-end 10-year bond rallied up more than 3 percent on the day. Should the bond market continue to rally, the Central Bank of the Republic of Turkey (CBRT) may entertain potential rate cuts at its upcoming meetings, decreasing borrowing costs for businesses already weary of U.S. Federal Reserve rate hikes that would further constrain lending in emerging markets.

Perhaps the most important of market movements, Monday was the robust rally in the Credit-Default Swap (CDS) market. CDSs are essentially insurance contracts that hedge investors against economic and political risk. Turkish five-year corporate bond CDSs lost nearly 8 percent of their value on Monday, meaning it was 8 percent cheaper to insure investments against potential economic risk in Turkey. The landslide victory Sunday was an indication to foreign investors that Turkey may have returned back to a track of prosperity as uncertainty around the strength of the next government has been resolved.

With political uncertainty out of the way in Turkey for at least the next four years, the nation is poised to continue on the path of economic reforms. The new government will continue the work of previous governments, liberalizing an economy in much need of liberalization. The AK Party has signaled that proven leaders will take the mantle of turning around an economy shaken by the uncertainty that had hurt Turkey following the June 7 elections. It appears that as the world enters the third dip of the Great Recession, Turkey has been able to escape the throes of gridlock and will have capable leaders at the helm, during this, the most turbulent of times.

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