Markets’ political wonderland to turn into a nightmare

Let me cut to the chase right away: I have no idea what percentage of votes the ruling Justice and Development Party (AKP) will get in the local elections on Sunday, March 30. The polls range from 38 to 50 percent. But I can tell you how the markets will respond under different scenarios – and why they are wrong.

The markets feel that if the AKP manages get more than 40 percent, political uncertainty and instability will end: For one thing, they think the AKP’s victory in the general elections, and therefore the continuation of a “stable” one-party rule, will be sealed. They also believe Prime Minister Recep Tayyip Erdoğan could increase the powers of the presidency before running for the position in the summer. Therefore, we could see a rally in Turkish assets Monday morning if the AKP surpasses this “magical threshold.”

I don’t see uncertainty and instability fading anytime soon, and so I believe any rally will be short-lived. Notwithstanding the fact the Turkish political landscape may drastically change even in a few weeks, this consensus argument suffers from other flaws: For one thing, if the two main opposition parties manage to get 45 percent of the votes, as almost all the polls are predicting, they may be able to agree on a credible candidate against Erdoğan.

Besides, if Erdoğan indeed plans on running for president, he will undoubtedly resort to pork-barrel spending, harming economic fundamentals. Needless to say, the Gülenists will not sit down and watch. Some believe they have saved the potentially most destructive “tapes” for the presidential elections. They are likely to strike back even if Erdoğan goes after them with a vengeance after the local elections.

It is also not so logical to consider just the total percentage of the votes of the AKP. What if they manage to get 45 percent but lose Istanbul and/or Ankara? Most polls claim the Republican People’s Party’s (CHP) popular candidates have almost caught up with the AKP’s incumbents in both cities.

Besides, I would not be surprised if we start to see more and more protests toward the summer. The continuation of the purge of Gülenists from the bureaucracy, as well as more attacks on companies, including the media, close to Fethullah Gülen may also add to political and economic uncertainty and instability.

My only “enduringly market-friendly” scenario is one in which the AKP gets around half of the votes, but even that, by itself, would not be enough. Seeing that resistance is futile, the Gülenists would need to surrender. Realizing that there are no threats to his rule anymore, Erdoğan would in turn need to adopt more conciliatory and inclusive policies. If nothing else, this last assumption is not very realistic.

All in all, if there is a rally Monday morning, and you decide to jump in on it, be sure you are not left standing when the music stops – as it is likely to stop soon, when markets wake up to the reality. All I am asking for this valuable advice is for you to #RememberBerkin.