November 2, 2015 / 8:50 AM / 2 years ago

UPDATE 5-Turkish markets surge on return to single-party rule

5 Min Read

* Lira rallies 3 percent, shares up 5 percent

* Gains driven by strong election win for Erdogan's AK Party

* Its majority ends months of investor uncertainty (Updates investor comment, prices, adds story links)

By David Dolan and Daren Butler

ISTANBUL, Nov 2 (Reuters) - Turkey's lira was on track for its biggest one-day gain in seven years on Monday and stocks were up 5 percent after an election restored single-party rule, ending months of uncertainty for investors.

The AK Party, founded by President Tayyip Erdogan, won just short of 50 percent of Sunday's national vote, giving it around 317 seats in the 550-seat parliament and a far higher margin of victory than even party insiders had expected.

Uncertainty had plagued Turkey's markets since the AKP lost its single-party majority in a June election.

"If (the AKP) take a mature, more democratic approach and do what needs to be done in terms of addressing security and economic concerns and allowing the central bank to be independent, it will be a very positive outcome," said Anders Faergemann, senior sovereign portfolio manager at PineBridge Investments.

However, in the longer term the latest result may widen political divisions.

Political concerns have kept Turkish assets lagging their emerging market peers this year, with the lira down around 20 percent.

But by 1525 GMT the currency was heading for its biggest one-day gain since November 2008, up more than 3 percent against the dollar at 2.8230.

The BIST 100 share index surged 5.4 percent, its biggest one-day jump in two years.

Major stock gainers included construction companies and real estate investment trusts, expected to benefit from AKP economic stimulus, while shares closely linked to Erdogan's political rivals fell.

Longer term, "this is inevitably going to raise fears about an even more authoritarian, an even more economically populist, nationalistic Turkey," said Nicholas Spiro, managing director of Spiro Sovereign Strategy.

Banks rallied, though Moody's cautioned they still faced "elevated risk aversion" toward emerging markets. Bond yields fell, as did the price of insuring Turkish debt against default.

Erdogan Emboldened

The election result could embolden Erdogan and the AKP to extend policies that have already divided the country, said Inan Demir, chief economist at Finansbank, in a note.

These could include "insistence on executive presidency, unrelenting pressure on opposing business and media groups, aggressive foreign policy, hardliner stance regarding the Kurdish issue and obsessive calls for lower interest rates".

Sunday's election was called after the AKP failed to find a junior coalition partner following the June vote. Erdogan's critics said it was a gamble by the combative leader to win back enough support so the party can eventually change the constitution and give him greater presidential powers.

Seeking to win back nationalist support, the AKP government in recent months struck against Kurdish militants, putting an end to a 2-1/2-year ceasefire and sparking almost daily violence in the largely Kurdish southeast.

Erdogan has also cracked down on opposition media groups and companies linked to a prominent political ally-turned-foe, U.S.-based Islamic cleric Fethullah Gulen.

Shares in Dogan Holding - whose media affiliates are being investigated by prosecutors - tumbled 14 percent.

Shares in mining company Koza Ipek and sister firm Koza Metal also fell. The owner of both companies is close to Gulen and the firms have been under investigation over accusations of terrorism.

It's the Economy...

"Political turmoil has caused Turkey to lose the confidence of foreign capital and foreign investment," said Jonathan Friedman, Turkey analyst at global risk consultancy Stroz Friedberg. "Unless the new government finds a way to address the social tensions dividing the country, that confidence is unlikely to come back."

One move that could partially reassure investors would be the inclusion of former Deputy Prime Minister Ali Babacan, long seen as a stabilising influence, in the AKP's economic team. They will also watch whether Erdogan honours the central bank's independence, said William Jackson of Capital Economics in a note. "However, given developments over the past few years, we're not holding our breath." (Additional reporting by Nevzat Devranoglu, Ebru Tuncay and Ceyda Caglayan in Istanbul,; Jonny Hogg in Ankara and Sujata Rao in London; Editing by Tom Heneghan/Ruth pitchford)

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