Erdogan under pressure
Against this backdrop, Eurasia Group's Gordon thinks there is a big risk that PM Erdogan could step up his divisive populist rhetoric. Gordon says that whereas Erdogan in the past had shown a more pragmatic view, party and political relations are already becoming strained thanks to the uncertainty about the role of the president versus prime minister. Erdogan will try everything to prevent President Gül from taking the chairmanship of AKP in September. While it is widely expected the AKP will win local and national elections this year, unpredictability within the party is set to continue.
Turkish stocks to continue lower
Christian Keller, Head of Emerging Market Research from Barclays, thinks Turkish equity markets could continue to move lower. With the Turkish lira having dropped substantially, Keller thinks the weaker currency will start to have an impact on the corporate sector. There is an argument that short-term Turkish interest rates should be 3-4 percentage points higher to counterbalance the weak lira. If the Turkish central bank were to hike rates to strengthen the lira, it would hurt stocks, and Keller says the financial sector in particular would be vulnerable. Keller also points out that around 60 percent of the main index in Istanbul is comprised precisely of financials.
(Read more: Emerging market stocks that could escape 'taper tantrums')
According to Barclays research, the recent emerging market outflow trend has shown retail investors exiting, while institutional investors to some extent have remained. Keller says activity in the first quarter will determine whether continued weak emerging market data could turn this into an extended move through 2014, or whether it was just a short-lived dip.
Institutional investors in developed markets have tiny amounts of money allocated to emerging markets at the moment. Keller highlights that this isn't reflective of the growing share of emerging market GDP in global GDP. According to Keller, over the next 5 years, strategic allocations should continue, and growth will becoming from emerging markets.
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