Foreigners Key to Turkish Stocks as Locals Lured by Higher Rates

Tugce Ozsoy and Inci Ozbek
·5 min read
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(Bloomberg) -- As higher deposit rates threaten to stunt the appeal of Turkish stocks for domestic investors, foreign capital inflows could be the market’s best chance to extend its longest rally in more than a quarter of a century.

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Turkey’s benchmark Borsa Istanbul 100 Index has soared about 43% in lira terms this year, and is headed for its fifth year of straight gains. If it closes around these levels, it will mark the longest streak of annual advances since 1997. But while gains are broadly expected by fund managers and strategists to be extended into 2024, the dynamics are changing, and for foreign investors the market’s performance has been overshadowed by the slide in the lira.

Read more on: For Turkey’s Investors, 2024 Is Still All About Winning Trust

Domestic buyers have been the main drivers of the rally in Turkish shares in the past three years as interest-rate cuts in the runup to presidential elections last May persuaded them that their best protection against soaring inflation lay in stocks. Since the end of 2019, the number of equity investors, most of them local, climbed about sevenfold, according to data from Turkey’s Central Securities Depository.

Monetary easing, which ran counter to the tightening stance of most global central banks, turned stocks into one of the few havens that could protect local investors’ savings against high inflation.

That trade by locals has now come under pressure as the new management of Turkey’s central bank has started to deliver sizeable rate hikes. The return on lira deposits, a traditional tool for locals, has been increasing steadily, offering an alternative place for retail investors to park their savings.

The weighted average interest rate for lira deposits with a maturity of up to three months has climbed over 50%, reaching a fresh 21-year high, as the Turkish central bank tightened monetary policy. Since June, Turkish policymakers have raised policy rate to 40% from 8.5%.

“It’s important that foreign investors return, because high interest rates on deposits are luring locals,” said Mehmet Gerz, chief executive officer at Ata Portfoy. “As locals are selling, foreign investors are buying and this is what has been providing stability to the main stock exchange. This may continue next year.”

Return to Orthodoxy

Following his re-election at the end of May, Turkish President Recep Tayyip Erdogan named Mehmet Simsek, an ex-Merrill Lynch strategist, as his finance minister, and Hafize Gaye Erkan, a former Wall Street banker, to head the central bank. The appointments of Simsek and Erkan, who promised a gradual return to orthodox policies, sparked optimism among investors that Erdogan may be finally abandoning policies that led to flight of foreign investors.

Inflation, which is running near 62%, is forecast to peak at between 70% and 75% in May and to end 2024 at 36%, according to the central bank. “Annual inflation will rapidly fall after June,” Erdogan said in early December, adding that “monetary policy works with a lag.” Even though a decline in inflation will be welcomed, this means that stocks may no longer be a hedging tool for domestic investors.

Thanks to $2.33 billion of net foreign purchases since elections, net capital flows from overseas investors into Turkish equities are set to turn positive this year for the first time in four years. Inflows suggest overseas investors are more optimistic and may be ready to give a chance to Turkish stocks again after years of unconventional policies sent foreign ownership in Turkish stocks to record lows.

Read more on: Foreigners Turn Net Buyers of Turkish Assets Since 2017

Those inflows will likely increase in 2024, particularly after voting in local elections across Turkey in March, according to Strateji Portfoy’s Burak Cetinceker.

“As the policies implemented by the new economic management begins to bear fruit, the demand for Turkish assets will increase,” he said. “It looks like the first fruits will appear in bonds; however, I think that foreign interest in stocks will increase, especially after the election.”

The fact that Turkish stocks are trading at a discount of more than 60% to their emerging market peers, based on anticipated future earnings, is also a supportive factor if foreigners’ more favorable sentiment proves to be lasting. The BIST 100 Index trades at just 4.1 times its estimated earnings over the next year, compared with 11.4 times for the MSCI Emerging Markets Index.

Hard Task

To be sure, not everyone is convinced that Turkish stocks are heading higher next year, pointing to the headwinds the country still faces.

Foreign purchases will likely “not happen fast enough to absorb the likely selling by disillusioned locals,” said Murat Gulkan, CEO of OMG Capital Advisors, who said he’s not “terribly optimistic about Turkish stocks in 2024.”

With concerns over whether policy normalization will continue, and the extent to which the lira may weaken further, attracting more foreign money into equities could prove hard.

Foreign ownership of Turkish equities has recovered to about 34% currently, according to data from Takasbank. While that’s above the level at the end of last year, it’s still significantly below its historical average of about 60%.

For Marmara Capital’s Haydar Acun, who also sees foreign inflows rising next year, especially after the local elections, “attracting big, long-term funds back into Turkish equities” still will not be easy. Acun says those coming will likely be hedge funds.

Without confidence in a healthy and stable currency, Turkish stocks aren’t as attractive for large overseas institutional investors. In 2023, despite the gains in Turkish stocks for lira-based shareholders, the BIST 100 Index was down 7.8% in dollar terms.

The significant discrepancy between local stock gains and currency losses seen in 2023 signals “continued caution” at this stage, according to Bank Julius Baer’s Nenad Dinic. “The Turkish lira is depreciating by the same amount as local stocks gain in value, leaving foreign investors with zero returns in dollar terms,” he said.

(Updates with prices throughout)

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