In an era of ultra-low interest rates, Turkey’s stock exchange emerged as the preferred option for residents looking to protect their savings from rampant inflation. However, with tighter monetary policies expected to persist into next year, this equities boom is rapidly fading.
Investment Dynamics
The rationale was straightforward: with central bank interest rates in single digits and inflation soaring at 80%, traditional bank deposits would ultimately yield losses. Investing in stocks offered Turks a glimmer of hope that their capital would not devalue as quickly.
Surge in Stock Market Participation
This led to substantial inflows into the market, transforming Turkey’s stocks into standout performers. The Borsa Istanbul All Shares Index surged 440% since the end of 2021, leading to a tripling of individual equity accounts, which reached 8.6 million last October. This statistic translates to one in three Turkish households engaging in stock investment.
Reversal of Fortune
However, the optimistic landscape for equity investors is shifting as President Recep Tayyip Erdogan, after his reelection, has pivoted to more orthodox economic policies. His administration has raised interest rates to 50% to combat inflation, signaling a commitment to maintaining high rates for an extended period.
Impact on Investment Choices
The hike in interest rates has seen returns on three-month lira deposits soar to as much as 69% in April, undermining the risk-reward appeal of stock ownership. Betul Seckin, a 32-year-old software specialist, expressed relief at exiting the market just in time, choosing to place her funds into lira deposit accounts.
Market Performance Decline
The Borsa Istanbul All Shares Index recorded a 6.8% decline in the third quarter, while the MSCI Emerging Market stock index advanced by 4.6%. This downturn is reflected in a decrease in the number of Turkish equity accounts.
Inflows vs. Outflows
Despite promises of a return to policy orthodoxy led by Treasury and Finance Minister Mehmet Simsek, which have drawn inflows into Turkey’s assets, non-residents have been withdrawing from the stock market. Since mid-May, they have sold a net $3.2 billion worth of equities, according to official data. Initially, domestic funds absorbed these outflows, but the situation became evident in the third quarter.
Normalization of Market Conditions
The decline in shares, particularly among small- and medium-sized companies favored by domestic investors with shorter investment horizons, began before the broader market downturn. Notably, an index of Turkey’s newly listed companies, which once attracted retail investors, is now lagging behind the broader index for the first time in six years.
Regulatory Warnings
The Capital Markets Board of Turkey has issued repeated warnings to stock investors, many of whom lack trading experience. The board urges investors to rely on licensed industry professionals rather than social media advice.
Changing Investor Sentiments
Evren Kirikoglu, founder of consultancy Orca Macro, noted that many retail investors developed an unrealistic expectation that stock prices would continuously rise, a belief fostered by previous market performance. As reality sets in, this expectation is met with disappointment.
Conclusion: Market Adjustments Ahead
Burak Cetinceker, a fund manager at Strateji Portfoy in Istanbul, emphasizes that as interest rate-based investments emerge as viable alternatives for hedging against inflation, confidence in Turkish stocks has diminished. He views the current market conditions as a natural cycle, marking a significant normalization after a period of explosive growth.
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