Foreign investors pile into Turkey’s stock market after election

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Foreign investors scooped up almost $1bn of Turkish equities in a three-week buying spree last month as the country’s new economic programme and bargain prices lured fund managers into a market that has been shunned in recent years.

International investors purchased $974mn of Turkish stocks in the three weeks to June 23, according to Financial Times calculations based on newly released data from the central bank. It marked the strongest net inflows since November 2021.

The recent influx of funds to Turkish equities came as President Recep Tayyip Erdoğan shook up his economic team following his election victory in May. Finance minister Mehmet Şimşek and central bank chief Hafize Gaye Erkan, who were appointed in June, have vowed to set Turkey on a “rational” path after years of unconventional policies triggered an economic crisis and sent foreign holdings of Turkish stocks and bonds to historic lows.

“[Turkey] has probably started to become appealing, at least for certain types of foreign investors,” said Emre Akcakmak, a senior consultant at East Capital, a specialist emerging-markets fund manager.

Turkey’s lira has fallen 20 per cent against the dollar since the start of June as the new economic team curtailed its policy of propping it up, which had left the country’s foreign currency war chest seriously depleted. The weak lira has made Turkish stocks much cheaper for foreign investors, with the benchmark Borsa Istanbul (Bist) 100 index down about a fifth this year in US dollar terms.

The market also remains inexpensive from a valuation perspective: the Bist 100 index is priced at about 5 times expected earnings over the next year, despite posting a world-leading return in 2022, FactSet data shows. In comparison, the forward price-to-earnings ratio for MSCI’s broad emerging markets index is about 12, while it is 19 for Wall Street’s S&P 500.

“From a risk-reward perspective, you’re talking about a market that’s beaten down quite a bit . . . both in US dollar terms and in terms of multiples,” said Akcakmak.

Some analysts are also turning cautiously optimistic that Şimşek and Erkan will be given the leeway to continue rolling back at least some of Erdoğan’s unorthodox policies, such as his longtime objection to high interest rates despite acute inflation. Erkan’s central bank has already nearly doubled borrowing costs to 15 per cent and eased some bank regulations that were part of a scheme to keep consumers and businesses from holding dollars.

“Foreign interest [in Turkey’s markets] has increased as the uncertainties about what kind of monetary policy the central bank will implement have been overcome,” said Enver Erkan, chief economist at Istanbul-based brokerage Dinamik Yatırım Menkul Değerler. “When we look at the process after the elections, the steps towards softening the regulations on banks and starting to implement gradual orthodox policies are welcomed.”

Still, Akcakmak said it was probably “tactical” investors who were now betting on Turkish stocks, rather than longer-term strategic investors, given the significant risks such as a further fall in the lira.

Murat Gulkan, chief executive of OMG Capital Advisors in Istanbul, added that some of the inflows might be “short covering”, meaning investors trimming bearish bets on the stock market or Turks bringing back money they had stowed abroad.

“It is hard to say long-term strategic investors are pouring into the stock market,” said Akcakmak.