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Turkey’s blistering stock rally has hit reverse as juicy interest rates lure savers out of the market and foreign investors cash in on recent gains.
Istanbul’s benchmark Bist 100 index dropped 8 per cent in August, its biggest decline since President Recep Tayyip Erdoğan shook markets in October 2023 when he strongly criticised Israel for its offensive in Gaza. MSCI’s Turkey benchmark, which tracks the performance of the market in US dollar terms, fell 10 per cent, the worst rout of any country in the index provider’s widely followed emerging markets gauge.
The pullback in Turkish stocks highlights how Ankara’s attempt to rein in scorching inflation with a sweeping economic overhaul is rippling through the country’s capital markets and $1tn economy.
“The stock market is out of steam,” said Emre Akcakmak, portfolio consultant at fund manager East Capital, noting that some foreign investors who had recently “piled in” were now headed for the exits.
Turkey’s stock market has posted big gains in recent years, with the Bist 100 more than doubling in dollar terms since the start of 2022, as local investors turned to equities to protect their savings against inflation, which peaked above 85 per cent in late 2022.
Foreign investors, who had sharply cut holdings in Turkish equities since the mid-2010s, also began finding a taste for them again after Erdoğan ditched some of his unconventional economic policies after his re-election in May 2023.
Mehmet Şimşek, a former Merrill Lynch bond strategist who Erdoğan appointed economic tsar in June last year, has implemented a series of investor-friendly policies. The centrepiece of the finance minister’s new programme has been huge rises in the cost of borrowing, reversing a failed policy of holding rates low.
Turkey’s central bank has raised its main interest rate from 8.5 per cent in June 2023 to 50 per cent. Istanbul’s equities market initially responded well to the more conventional economic policies, and had risen 27 per cent in dollar terms from the start of 2024 through the end of July.
However, local savers are now being lured by the appeal of high rates available on lira bank deposits and money market funds. The annualised interest rate on lira bank deposits of up to one year is around 53 per cent compared with 22 per cent a year earlier, according to central bank data. The rates on offer compare favourably with market participants’ expectations of year-end inflation of around 43 per cent, although they are below the July inflation rate of 62 per cent.
Tunç Yıldırım, head of institutional equity sales at Istanbul-based investment bank ÜNLÜ & Co, said local buying of equities has cooled as “fatigue” sets in and because savers have a growing variety of alternatives for stashing their cash that provide moderate returns.
International investors who have entered Turkish markets have predominantly been hedge funds and emerging market specialists who generally move more quickly than bigger mainstream managers, Akcakmak said. These funds have made significant gains this year, and are now beginning to exit the market at the same time as local investor interest is dimming, he added. In total, foreign investors have pulled around $2.4bn since the start of May, central bank data shows.
Analysts noted that the outlook for Turkish stocks will also depend on whether policymakers sustain their commitment to tight economic policy even as political pressure mounts on Erdoğan’s government over the effects on households and businesses of the new programme.
Policymakers are expected to unveil their medium-term economic plan in the coming weeks, and investors say they will closely scrutinise the documents for clues on how far Erdoğan is willing to go in cooling Turkey’s economy and bringing down inflation.
“September is going to be extremely important because policymakers need to re-anchor market expectations for 2025,” Yıldırım said.
