The Istanbul Stock Exchange is the last refuge of Turkish hedgers in the face of inflation

At first glance, there is something to dream about in the performances of the Istanbul Stock Exchange. As Wall Street dragged global markets into the red last year, the BIST 30, the flagship index of the Turkish Stock Exchange, traded at an all-time high, gaining nearly 200%. Even the high-tech Nasdaq, known for its remarkable stock performance, has never seen such a rise in a single year.

Admittedly, the fall of the Turkish lira explains part of this performance. It lost nearly 30% of its value against the dollar last year, the tenth year in a row that it has depreciated against the dollar. But even measured in fixed currency terms, the Turkish Stock Exchange’s performance remains exceptional: the dollar-denominated MSCI Turkey index, for example, rose 85% last year.

Forwarding of deposits

Remi Marcel-Villerabel at Amundi notes that “Growth last year was generalized from banks to aviation. Turkey’s economy benefited significantly from the war in Ukraine thanks to its important ties with both Europe and Russia. But economic factors alone are far from justifying the flight of the Istanbul Stock Exchange. “The surge in stocks last year was primarily a matter of inflows, and especially in the face of hyperinflation, savings were diverted into real estate and stocks,” he explains.

Since last February, prices have indeed risen by more than 50%, which meets the definition generally used to talk about hyperinflation. More than 80% for four consecutive months and fell to 64% in December after reaching a 24-year peak of 85% in October. In parallel, the Central Bank of Turkey (TCMB) implemented the controversial monetary policy requested by the President of Turkey. Unlike policies seen elsewhere in the world, where central banks raise interest rates to stem inflationary pressures, the CBRT continued to cut interest rates from 19% in March 2021 to just 9% last November.

To avoid the vicious circle of capital flight and currency collapse, the government has increased regulatory measures and incentives to encourage Turkish residents to convert their foreign currency savings into Turkish lira. The main measure is a state guarantee against the risk of future depreciation, together with tax benefits as a bonus. Turkey also benefited from bilateral transfers from friendly countries. With some success, as these measures have stabilized the Turkish currency around 18 lira to the dollar since last August.

Foreign investors have left the country

In the absence of an attractive alternative, funds thus converted into local currency were often placed on the stock exchange. “High inflation weakens the purchasing power and savings of households – stocks can be considered as a shelter”, emphasizes Irina Topa-Serry of Axa IM. As foreign investors left the country or stayed away, burning with runaway inflation and currency depreciation, Turkish residents took their place in the stock market. The latter own more than 70% of the shares listed on the Istanbul Stock Exchange, compared to 35% to 40% from 2010 to the end of 2019.

However, Turkey’s stocks have stagnated since the beginning of the year. Even as global stock markets are on the rise again, the BIST30 index has lost more than 4% since January 2 and the Turkish currency hit an all-time low against the US dollar on January 14 at 18.8 pounds to the dollar. At issue is the unsustainable duration of the measures taken by the government to protect the currency, the high cost to the state budget, and the a priori proximity of the legislative and presidential elections in May, which the opposition may think of. . “The market is heating up as the elections approach, which is evident in the face of growing uncertainties about future macroeconomic policies,” said Irina Topa-Serri.