On Sunday, something “surprising” happened in Turkey: AKP rebounded from a relatively poor showing in June’s elections to collect nearly 50% of the vote at the ballot box.
We are of course employing a bit of sarcasm when we say that the results were “surprising.” Sunday’s farcical elections are the culmination of a four month campaign [6] by President Recep Tayyip Erdogan to restore AKP’s parliamentary majority and pave the way for a power grab that will entail alterations to the country’s constitution.
Make no mistake, Erdogan wasn’t shy about pulling out all the stops. He effectively engineered a civil war in order to scare the electorate out of supporting the pro-Kurdish HDP and the PKK has variously accused Ankara of being complicit in suicide bombings that have killed hundreds of Turks. Erdogan has also cracked down on the press and anyone who even looks like a dissenter leading directly to a scenario wherein a key emerging market has plunged into political and economic chaos.
Of course the market hates uncertainty worse than almost anything else which is why sadly, Sunday’s election outcome (which represents nothing short of an usurpation of the democratic process) has sent the lira surging.
As we noted [7] on Sunday evening, this is the biggest rally since 2008.
Even as it isn't entirely clear that Erdogan has the 330 seats he needs to expand his powers, the market is looking for a relief rally. Here's Barclays:
According to the unofficial results of Turkey's snap elections, the Ak Party got 49.4% of the vote, with the main opposition party CHP on 25.4%, nationalist party MHP on 11.9% and the Kurdish party HDP on 10.7%. With this outcome, the Ak party would win 316 seats in the Parliament, more than the 276 seats needed to form a single-party government structure, albeit less than the 330 to call for a referendum on changing the constitution.
We think the outcome is a positive surprise for the markets as pre-election opinion polls indicated coalition government scenarios. We believe two major short-term risks ahead of Turkey have been diminished now. 1) a weak coalition scenario or repeat of elections and 2) rating downgrade risk ahead of Moody’s review on Dec 4th. However, medium-term risks are still valid, including: 1) uncertainty in the management of the economy with a major question being whether Mr Babacan, former Deputy Prime Minister who is responsible for economy will be the leader of the economy; 2) external factors that may continue to be a pressure on EM currencies and also Turkey in 2016; and 3) slow growth.
The Turkish equity market has fallen by 26% YTD, underperforming the MSCI EM Index by 16%. The correction brought down the 12-month forward earnings multiple to 10.7x and implies that Turkish market trades at a 13.5% discount to MSCI EM Index, nearly the highest discount level in the past 5 years.
And here's a look at Turkish equities in the wake of the election:
[8]
But while the market cheers, HDP is crying foul, claiming widespread voter fraud (via Sputnik [9]):
Turkey’s pro-Kurdish People’s Democratic Party (HDP) headquarters received complaints of fraud from polling stations across the eastern Turkish province of Agri, a Sputnik correspondent reported Sunday.
Intense security presence was observed throughout the polling stations, with entrance bans in place for foreign observers and journalists.
Leyla Zana, one of 80 HDP candidates into Turkey’s 550-seat Grand National Assembly, voted earlier in the northwest Agri city of Eleskirt. Zana also reportedly experienced problems with access to the station.
In the Kurdish city of Diyarbakir, police brought out the tear gas and water cannons as civilians protested the election outcome:
Clash erupted bw police, Kurdish youth in central Diyarbakir after results show surprise upward shift in AKP votes. pic.twitter.com/Z1DqOeQdFQ [10]
— Ayla Albayrak (@aylushka_a) November 1, 2015 [11]
Another still shot:
Apparently, one dissatisfied citizen went so far as to attempt a one-man assault on a mansion where Erodgan was staying on Sunday evening. He was promptly shot, although there are competing accounts as to whether he committed suicide or whether he was killed by Turkish police.
Here's the official account from state-run AA (via Bloomberg):
- A person involved in an incident outside a mansion in Istanbul used by President Recep Tayyip Erdogan, who was earlier reported by local media as having been shot by police, shot himself, Turkey’s state-run Anadolu Agency says.
- Person argued with guards at the guest entrance to the Huber mansion, then grabbed a guard’s gun, shot at police and then shot himself in the head, Anadolu says
Draw your own conclusions.
In any event, the question now is whether the PKK will step up attacks on government forces and whether Ankara will protest Washington's move to station US commandos with the YPG in Syria.
In short, this is a mess that isn't going to be cleaned up with one (possibly) rigged election. Investors may want to fade this rally...