Here are some thoughts from wealth managers about one of the most important set of elections due this year and in a strategically critical country.

A number of wealth management houses have set out their thoughts the national elections in Turkey. According to news reports, Turkish President Tayyip Erdogan's hopes of assuming greater powers have been knocked after the ruling AK Party failed to win an outright majority, at least as far as preliminary results indicate.  The country has been seen as a pivotal one for centuries. It is a relatively secular country, albeit with a large Muslim population. It is close to Russia and, at its southern border, to war-torn Syria and Iraq. It has a population of around 80 million and, as this publication has at times noted, has the potential for great prosperity and fast growth (its population is relatively young). A number of wealth management firms have a presence in the country (see here).

There have been concerns, however, because of worries about the authoritarian drift of Turkey’s ruling AKP party, a factor that is unlikely to improve the country’s chances of negotiating for European Union entry any time soon. The Turkish lira has come under some pressure. The MSCI Turkey index of the country’s equities is down 14.2 per cent, compared with the MSCI World Index of developed countries’ shares showing a return (capital plus reinvested dividends) of 5.72 per cent (figures are in dollars). There are tensions that remain with Kurds in the eastern part of the country. Turkey has its problems - but potential remains. Here are commentaries (note that the comments were largely written just before the voting process began yesterday):

Manolis Davradakis, senior economist at AXA Investment Managers
Turkey’s general election will end the long election period entered in 2014 with local and presidential elections. The general election will not be an easy ride for the incumbent AKP party as its public support wanes after more than a decade in power. The Kurdish HDP party is likely to pass the 10 per cent electoral threshold, enter the parliament and retain its seats. As a result, no party may have an outright parliamentary majority.

Current polling puts support for the AKP in the 40 per cent to 47 per cent range, and above the 10 per cent for the HDP. Political risk may remain even after the June elections due to the envisaged constitutional changes and likely reshuffle of the successful and market-friendly economic team.

Expected monetary policy normalisation in the US and mounting political risk will weigh on the Turkish lira and the inflation outlook. Rating agencies will likely remain vigilant.

Erdinç Benli, co-head of the global emerging markets team at GAM
Headline political news for Turkey’s ruling AKP party has been negative in recent years: the suppression of the Gezi Park protests, the blocking of social media, and most recently a Turkish court ruled that the lavish presidential palace has been built illegally. Economically, unemployment has risen while the Turkish lira has weakened dramatically. However, the support that the AKP enjoys among the electorate should not be underestimated.

Overall, the AKP’s rule since 2002 has been a success story for Turkey, thanks to reforms, privatisation and fiscal discipline. Inflation has come down sharply, while GDP per capita has tripled thanks to the strength of the economy. Crucially, much-improved political stability compared to the 1990s has supported increased investment in Turkey.

The best case and most likely scenario from an investor point of view is that the pro-Kurdish Peoples’ Democratic Party HDP enters parliament by passing the 10 per cent threshold, and at the same time the AKP keeps its majority. This outcome would lead to more political stability, and social unrest by Kurdish supporters would be unlikely owing to their representation in parliament. At the same time, a relatively stable one-party government, led by the AKP, could continue with its policies.

In order to change the constitution and pursue an executive presidential system, the AKP would need to form a coalition with another party. This would bring more consensus-oriented policy-making with stronger checks and balances of power.

The game changer in this election could be that the HDP passes the 10 per cent threshold, but the AKP loses its majority for the first time since 2002 with fewer than 50 per cent of the seats. The AKP would lose its single-party majority and would need to form a coalition government. Investors would not welcome this outcome since the politically stable environment would be in danger and the market would likely react negatively in the short term. Difficulties to reach consensus between the coalition parties would hinder much-needed additional reforms and lead to rising tensions, and eventually to early elections.

Middle to longer term, this worst-case scenario could actually lead to better policy-making and improve Turkey’s progress. Turkey is still a relatively young democracy; its multi-party parliamentary system was only put in place in the 1940s and democratic institutions are still in the process of being put in place. The country needs to go through this maturing process.

Turkey has a number of attractive structural drivers, including a young and entrepreneurial population, of which 50 per cent are younger than 30 years old. Aside from the party politics, of key importance for investors will be the new government’s economic agenda and the question of who would become the new leader of the economy. Prime Minister Ali Babacan was well respected and appreciated by investors over his three terms.

Since the end of January Turkey’s equity market has underperformed broader emerging markets. The currency has also weakened due to political uncertainty ahead of the elections and weaker economic dynamics. Even though the most likely election outcome is a single-party government led by the AKP, the probability of a coalition government has risen according to latest opinion polls.

With share prices retreating in the last two weeks, the market is in the process of pricing in such a scenario. Turkish equities have already de-rated quite significantly and are trading at the highest discount for the last five years. Any further setback in Turkish equities would offer an attractive entry point for long-term investors.

Turkey specialist Ege Seckin, at IHS Country Risk
A super-majority win by the ruling AKP would pave way for a series of constitutional changes providing President Erdoğan with executive power with reduced checks and balances. This bears important implications not only for the rule of law and individual rights in the country, but social stability and the ongoing peace process with the Kurdish separatist PKK.