There is a perception in the market that not even the most objective data are unable to break: the ruling party AKP will be victorious in the municipal election of March 30th 2014, it will defeat its political opponents, it will also win the presidential elections and thus it will return to the old pragmatic days and will start the reforms that will permit the economy to grow again at 5%.
Turkey is still moving by indexing herself to the developments in the Emerging Markets. Therefore, if the Emerging markets' assets crash, the TL denominated assets may perhaps not rise but will depreciate less. There is the AKP bubble in Turkey and it is incorrectly priced in terms of historical measures. This error will start to be rectified in the second half of April and will last until the presidential elections.
The trust in AKP is not the only reason why the TL denominated assets have appreciated during the month of March. The message of the Fed has been finally interpreted correctly. The Fed will delay as much as possible the monetary tightening, and when it will start doing it, it will do it as slowly as possible. Therefore, the carry trade money that should leave the Emerging Markets stays where it is and the U.S. dollar as well as the U.S. bond interest rates are trading weaker. Fed's generosity prevents the markets in pricing the threat of the crash in China, Russia's economy entering into a recession as well as slowing down Turkey and Central Europe. But every strong macro-economic data coming from the U.S. will force the determination of the carry-traders and will cause the Emerging Markets to change direction very often.
In particular in Turkey, the investors do not accept the fact that Ankara is stubbornly analogous to Moscow thus the public authority has lost its credibility and predictability. The prices of the financial assets in Russia are among the Emerging Markets which got the most discount. But in Turkey, with six days remaining to the elections, there is almost no discount.
This perception will carry on for a week or two following the elections. If AKP earns 40% or more of the votes during the municipal elections, Erdogan will receive a vote of confidence from the public and will thus get a visa for the presidential elections. The elections of March are one of the most difficult to anticipate in recent years but according to the available surveys, AKP may have a result that is a little more the 40%. Therefore, the investors who place their bets on the election results will not be disappointed. Of course, if the opposite happens and the AKP earns less then 40% of the votes (say 35%), we will witness one of the wildest sale wave in recent history, because in that scenario, Turkey becomes unmanageable and will face a strong global pressure for early elections.
Why wouldn't the rally of the elections last? If AKP does not receive 50% of the votes, the Gulen movement will not stop the war. They possess thousands of tape and video recordings and they will publish them everyday. The closing of the Twitter shows that the nerves of Erdogan do not withstand this daily cupping. Following the March elections, Erdogan will will implement a very harsh punishment campaign upon the Gulen movement. During this campaign, TUSIAD and the main stream media which stay neural in this fight, will also receive a severe battering. A mindset that shuts down the Twitter for nothing may also do the same to Facebook and Youtube; so what will happen next? The strategy of "all-out war after the elections" that Erdogan has already promised will first destroy the public confidence and then we will see again that private sector will not undertake any investment nor spending. Following that, the reactions all around the world will increase so much that even the most cold-blooded fund managers will avoid risk by stepping aside. It is precisely at that time that the longest wave of selling in recent history will begin.
If AKP does not receive 45% or more of the votes, it will jeopardize its probability of winning the presidential election of August 2014. First of all, Erdogan and Gul are receiving votes as much as their party does because they have alienated the voters. Secondly, the pause that started in the economy will become worse during the summer and will reduce the loyalty of the AKP supporters. And lastly, if Ocalan's requests are not met, the Kurds who are voting for BDP-HDP will retrieve their support from the AKP. Until now, the motto "spend as much as you collect taxes" which was permitting to AKP to secure the budgetary balance will disappear as it embarks into an electoral populism and thus will shake the bond market.
Thanks to the endless public means at its disposal and most importantly with its non-compliant attitude, the AKP will win the presidential election or even Gul may win. That's when we will start to talk about whether the bear market has reached the end. But there is a 40% probability that AKP plays the wrong cards and a person from the opposition wins the presidential elections. Again Turkey will become once more unmanageable. Perhaps the ISE will come to the threshold of the longest bear market of its history since its debut by dropping below 40.000 and we start to envision the landscape that will arise following the general elections of 2015.
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