(Bloomberg) -- During the era of ultra-low interest rates, Turkey’s stock exchange became the preferred way for residents to protect their savings from surging inflation. Now, with tighter monetary policy seen lasting well into next year, the equities boom is fading fast.
The trade idea was simple: bank deposits based on single-digit central bank interest rates amid 80% inflation will always be a losing proposition. By investing in stocks, Turks could at least hold out hope that their capital isn’t eaten away as quickly.
The massive inflows that followed turned Turkey’s stocks into star performers, with the Borsa Istanbul All Shares Index soaring 440% since the end of 2021. And the upturn was widely appreciated, with the number of individual equity accounts jumping more than threefold to 8.6 million last October — meaning that one in three Turkish households invested in stocks.
But the good times, at least for equity investors, are ending as President Recep Tayyip Erdogan reversed course following last year’s reelection and embraced more orthodox policies. His economics team has hoisted interest rates to 50% in a bid to curb inflation, and looks set to keep them high for months to come.
This elevated the rate on three-month lira deposits to as much as 69% in April, effectively derailing the risk-reward proposition of owning stocks.
“Luckily, I got out of the market just in time two months ago,” said Betul Seckin, 32, a software specialist in Izmir, some 480 kilometers (298 miles) southwest of Istanbul. “I put all my money into lira deposit accounts.”
Seckin isn’t alone, with the Borsa Istanbul All Shares Index losing 6.8% during the third quarter, even as the benchmark MSCI Emerging Market stock index advanced 4.6%. The number of Turkish equity accounts is also declining.
Promises of Turkey’s return to policy orthodoxy, shaped by Treasury and Finance Minister Mehmet Simsek, have attracted inflows into the country’s assets on a bet that its out-of-kilter economy will finally find sustainable footing.
But while embracing debt instruments, non-residents have been gradually withdrawing from the country’s stock market in past months, selling a net $3.2 billion worth of equities since mid-May, according to official data. Domestic funds initially replaced the outflows, masking the situation until the third quarter.
Time for ‘Normalization’
The drop in shares of small- and medium-sized companies, which are preferred by domestic investors with shorter investment horizons, started months before the selling spree spilled over to more established stocks.
An index of Turkey’s newly listed companies, once a magnet for retail investors, is trailing the broader index or the first time in six years. An index of SMEs is lagging the benchmark since the end of March.
The Capital Markets Board, Turkey’s market regulator, has repeatedly warned stock investors, many without much experience in trading, against following advice proliferating on social media, urging them to instead trust licensed industry professionals.
“Many retail investors formed this unrealistic view that stocks are always supposed to rise, because for a few years that was pretty much what happened,” said Evren Kirikoglu, the founder of Istanbul-based consultancy Orca Macro. “So when they face reality, they don’t like it.”
Burak Cetinceker, a fund manager at Strateji Portfoy in Istanbul, said that when interest rate-based investments became alternatives for those trying to hedge against inflation, the belief in Turkish stocks started to wane. Slowing economic growth and corporate earnings are only reinforcing this “natural cycle,” he said.
“The stock market was where the party was back then,” Cetinceker said. “So what we’re seeing now is rather a normalization.”
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