(Bloomberg) -- Turkish stocks are among the world’s worst performers in the second half, but their fortunes are already turning as money managers bet interest-rate cuts are coming soon.
The benchmark Borsa Istanbul 100 Index has slumped nearly 10% since the end of June as high rates made other asset classes more attractive. Foreign investors have sold a net $2.5 billion in Turkish stocks this year, fueled by withdrawals since mid-May. But the market is showing early signs of a recovery this month after the central bank hinted it might start easing.
“The market was definitely not expecting foreign outflows to be this large, and inflation has proven to be stickier than initially anticipated,” said Tufan Deriner, a managing partner at asset manager Istanbul Portfoy. “But the worst is probably over: We just need some new catalysts to emerge and become evident, such as the beginning of rate cuts.”
Though still up nearly 30% in 2024 as a first-half rally didn’t fully unwind, Turkish equities entered a bear market in October. A combination of rising rates and inflation eroded domestic corporate profits, while returns from alternative and less risky investments — such as lira deposit accounts and money-market funds — have found greater appeal among local investors.
Between June 2023 and March 2024, the Turkish central bank raised its policy interest rate to 50% from 8.5%. But after holding the high rate for eight straight meetings, the bank implied in November that a cut could soon be justified due to slowing inflation.
The possibility of rate cuts will certainly get attention from foreign investors and could be the “tipping point,” according to Thea Jamison, managing director at Change Global Investment LLC, who said the firm is bullish about Turkish stocks going into 2025.
Another signal may come when the annual adjustment in the minimum wage is announced, probably next month. President Recep Tayyip Erdogan has already pledged that minimum wage increases will continue to outpace inflation next year, but investors are hoping for a measured increase that will align with the central bank’s projections of the inflation rate falling to 21% by the end of 2025.
“Foreign investors will be watching the minimum wage hike,” Jamison said. “If that’s around or below 25%, the market will see it as positive for both inflation and interest rates going into 2025. In either case, the Turkish market can rally, with or without foreigners. There’s sufficient domestic liquidity.”
Not all agree on that: Strateji Portfoy’s Burak Cetinceker said the move in Turkish stocks in the second half of the year showed foreign inflows do matter, “given their outflows have weighed heavily on sentiment.”
The BIST 100 Index was up 0.6% as of 2 p.m. in Istanbul, led by gains in Yapi ve Kredi Bankasi AS and Coca-Cola Icecek AS.
The selloff in the second half of this year has pared overall foreign inflows since the 2023 presidential election to $486 million. That vote attracted funds into Turkish assets amid optimism over the pivot toward more orthodox policies.
While inflation has slowed from its peak of 75.5% earlier this year to 48.6% in October, rising living costs remain a pressing and politically sensitive issue for households.
“While inflation could take longer to subside than initially anticipated, it’s unlikely that the central bank’s next move will be a rate hike,” said Emre Akcakmak, a senior consultant at East Capital International AB in Dubai. “With a rate-cut cycle now in sight, Turkish stocks may have reached their bottom and could begin to recover, as current valuations appear more attractive.”
The optimism around rate cuts may have become visible, yet even when the central bank does start reducing, most economists, including those at Morgan Stanley and Deutsche Bank, see that happening only gradually.
“The main challenger of Turkish stocks will remain rate instruments, like money market funds and bonds,” Istanbul Portfoy’s Deriner said.
(Adds BIST 100’s move on Wednesday in 10th paragraph.)
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