Turkish stocks and the country’s currency strengthened on Monday after Turkey’s President Recep Tayyip Erdogan declared victory in a constitutional referendum that will dramatically expand his power.
The opposition is contesting the results of the vote, but assuming it holds, Turkey’s political system will now transition from a parliamentary to a presidential Republic. Its president, once a largely ceremonial role, will receive sweeping authority to appoint ministers and judges, call elections, and pass laws. It also could allow Erdogan to remain in power longer than 2019, after his current five-year term is set to end.
Investors bought up Turkish assets after the referendum, reasoning that it would, at least temporarily, relieve the simmering tensions between Turkey and some European leaders, according to Christian Lawrence, a currency strategist at Rabobank. In the run up to the vote, Erdogan was involved in testy exchanges with the leaders of Germany and the Netherlands after they cracked down on campaign events by Turkish politicians seeking to cultivate the expat Turkish vote.
Also, some feared the government might respond aggressively to a “no” vote because it has enforced a state of emergency since last summer’s aborted putsch.
But while these factors could continue to support the currency, market strategists believe the risks remain tilted to the downside.
Support for Turkish assets will likely fade if Erdogan continues to persecute alleged political dissidents. His administration has already jailed or marginalized more than 150,000 Turks in response to the attempted July revolt.
Investors are also worried that Erdogan might interfere in monetary policy. In the past, he has repeatedly pressured the central bank to keep interest rates low to help stimulate the economy. His attempts to strong-arm the central bank have typically inspired foreign investors to flee Turkish assets.
Charalambos Pissouros, a senior analyst at IronFX, warned investors in a research note published Monday that the lira could weaken if the central bank authorizes an abrupt reversal in its monetary-policy outlook when it meets April 26.
In a research note published Monday, Kit Juckes, global macro strategist at Société Générale, said the bank’s emerging-market strategy team had removed Turkey’s lira from a list of recommended trades.
“How long does the prospect of a shift away from secularism and away from democracy drive investors into the lira on the grounds that at least there is stability,” Juckes said in the note.
meanwhile, rose 1.4% to trade at 3.63 to the buck on Monday, compared with 3.68 to the greenback late Friday in New York.
The iShares MSCI Turkey ETF
largest exchange-traded fund to track the Turkish equity market, rose 1.4% on Monday, trading on heavy volume. Roughly 133,000 shares exchanged hands in the fund’s first hour of trading, a third of its 30-day average.
The fund is highly reactive to the country’s political situation, and as such has been extremely volatile over the past year, as Turkey grappled with terrorist attacks and its failed coup. While shares are up 13.5% thus far this year, it remains down 18% over the past 12 months, and it has lost half of its value since 2010, when it hit a record.
Despite the recent gains in the fund, investors already appear wary of Turkish assets. About $5.5 million was pulled from the $393.3 million fund in the past day, according to FactSet data, bringing its outflows over the past week to $12.6 million, and its outflows over the past month to $34.1 million.