* 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 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
However, in the longer term the latest result may widen
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
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.
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)