Turkey’s stock rally falters as high rates lure savers

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Turkey’s soaring stock has reversed as juicy interest rates pull savers out of the market and foreign investors take advantage of recent gains.

Istanbul’s benchmark Bist 100 index fell 8 percent in August, the biggest drop since President Recep Tayyip Erdogan rocked markets in October 2023 when he strongly criticized Israel for its offensive in Gaza. MSCI’s benchmark Turkey index, which tracks the market’s performance in U.S. dollar terms, fell 10 percent, the worst loss of any country in the index provider’s widely followed emerging market gauge.

The pullback in Turkish stocks highlights how Ankara’s attempt to control burning inflation with a sweeping economic overhaul is spilling over into the country’s capital markets and $1 trillion economy.

“The stock market has sold out,” said Emre Akcakmak, a portfolio consultant at fund manager East Capital, noting that some foreign investors who had “crowded in” recently were now heading for the exits.

Turkey’s stock market has posted big gains in recent years, with the Bist 100 index doubling in dollar terms since the start of 2022 as local investors turned to stocks to protect their savings against inflation, which has peaked at over 85% at the end of 2022.

Foreign investors, who had sharply reduced holdings in Turkish stocks since the mid-2010s, have started to find a taste for them again after Erdoğan abandoned some of his unconventional economic policies after his re-election in May 2023.

Mehmet Şimşek, a former Merrill Lynch bond strategist whom Erdoğan named economic czar last June, has implemented a series of investor-friendly policies. The centerpiece of the finance minister’s new program was huge increases in the cost of borrowing, reversing a failed policy of keeping rates low.

Turkey’s central bank raised its main interest rate from 8.5% in June 2023 to 50%. Istanbul’s stock market initially responded well to more conventional economic policies and rose 27 percent in dollar terms from the start of 2024 to the end of July.

However, local savers are now attracted by the appeal of the high rates available on sterling bank deposits and money market funds. The annual interest rate on bank deposits in pounds for up to a year is about 53 percent, compared with 22 percent a year earlier, according to central bank data. The rates on offer compare favorably with market participants’ expectations for year-end inflation of around 43 percent, although they are below July’s inflation rate of 62 percent.

Tunç Yıldırım, head of institutional equity sales at Istanbul-based investment bank ÜNLÜ & Co, said local buying of stocks had cooled as “fatigue” set in and because savers have an increasing variety of alternatives for to hide their cash, which offers moderate returns.

International investors entering Turkish markets were mainly hedge funds and emerging market specialists, which generally move faster than larger managers, Akcakmak said. These funds have made significant gains this year and are now starting to exit the market at the same time as local investor interest is waning, he added. In total, foreign investors have attracted about $2.4 billion since the start of May, central bank data show.

Analysts noted that the outlook for Turkish stocks will also depend on whether policymakers uphold their commitment to tight economic policy, even as political pressure mounts on Erdogan’s government over the effects of the new program on households and businesses.

Policymakers are expected to unveil their medium-term economic plan in the coming weeks, and investors say they will be closely scrutinizing the documents for clues about how far Erdogan is willing to go in cooling Turkey’s economy and reducing inflation.

“September will be extremely important as policymakers need to re-anchor market expectations for 2025,” Yıldırım said.