Comment: What does Turkish referendum mean for the markets?

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00:35 18/11/17

By Ipek Ozkardeskaya, London Capital Group.

Turkey is preparing to make the most critical decision of its modern history. Turkish citizens will go to the polls on Sunday April 16th to say ‘yes’ or ‘no’ to the constitutional change.

The referendum package includes 18 amendments to the constitution, mainly extending the authoritarian President Recep Tayyip Erdogan’s power at the heart of the country.

The main highlights are the abolition of the Prime Minister role by giving executive power to the President of the Republic, the abolition of military courts, the presidential right to assess four out of the thirteen highest judicial boards and the eradication of the ‘presidential neutrality’ clause, which will allow Erdogan to affiliate to his political party, the AK Party.

Radical changes in the constitution have revealed many questions regarding the health of Turkish democracy in the aftermath of an eventual ‘yes’ vote.

While the political tensions mount at the heart of a particularly polarized Turkish society, the financial markets are likely underpricing the risk of an eventual constitutional change.

The Turkish lira is gaining momentum to test the 100-day moving average, 3.6390, against the US dollar, which has acted as a solid support since September 2016. Borsa Istanbul index (BIST) hit the highest level in more than a year on the run up to the referendum.

The decline in the lira’s volatility after hitting the historical low levels against the US dollar and the euro in January, combined to relatively interesting return on rate differential attracted capital in the lira markets.

The USDTRY remained capped at 3.80 in the first quarter.

‘No’ vote could trigger a relief rally

A ‘no’ victory is expected to trigger a relief rally in the Turkish stock markets, the sovereign bond markets and the lira. In theory, no change in the current regime should hint at a political stability and bring investors back to Turkish assets to pursue their long-term investment plans.

The US dollar could ease to 3.55/3.50 against the Turkish lira. The 10-year yields could slide toward the 10% last seen on November 2016.

The BIST 100 could make an attempt to 93’398 level (all-time high reached on June 2013) and extend gains toward unvisited territories.

‘Yes’ vote would be a turning point in modern Turkish history

According to the latest opinion polls, ‘yes’ vote is slightly ahead.

A ‘yes’ vote will certainly be a new era in modern Turkey’s history. A regime change never comes without its risks. While some could qualify the change as a step toward a better political stability, some would agree that the consolidation in power in one man’s hands could be a threat to the Turkish democracy in the upcoming years.

The markets could sharply react to a ‘yes’ vote. Turkish stocks and the lira could suffer from a knee-jerk sell-off. Nevertheless, an eventual plunge could remain short-lived and encourage anti-establishment buyers to jump on the back of an eventual post-election rally in the stocks and the lira. However, the appetite in the sovereign markets could remain limited.

We remain prepared for two-side volatility heading into Turkey’s most critical political event.


The author is a senior market analyst at London Capital Group

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