Turkey bear market on the mend as investors bet on rate cuts BNN Bloomberg

(Bloomberg) — Turkish stocks are among the world's worst performers in the second half, but their fortunes are already turning as fund managers bet that interest rate cuts are coming soon.

The benchmark Borsa Istanbul 100 index has fallen almost 10% since the end of June as high interest rates have made other asset classes more attractive. Foreign investors have sold a net $2.5 billion worth of Turkish stocks this year, fueled by withdrawals since mid-May. But the market is already showing early signs of a recovery this month after the central bank hinted it could begin easing policy.

The market certainly did not expect such large foreign capital outflows, and inflation turned out to be higher than initially expected, said Tufan Deriner, managing partner of asset manager Istanbul Portfoy. But the worst is probably over: we just need new catalysts to emerge and become evident, like the start of rate cuts.

Although still up almost 30% in 2024 as the first half's rally has not completely subsided, Turkish stocks entered a bear market in October. A combination of rising rates and inflation has eroded domestic corporate profits, while returns from alternative, 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 key rate from 8.5% to 50%. But after keeping the rate high for eight straight meetings, the bank suggested in November that a cut might soon be warranted due to slowing inflation.

The possibility of a rate cut will certainly attract the attention of foreign investors and could be a tipping point, according to Thea Jamison, managing director of Change Global Investment LLC, who said the company was optimistic about Turkish stocks at the horizon 2025.

Read more: Türkiye's central bank prepares for rate cut after further restraint

Another signal could come when the annual adjustment of the minimum wage is announced, probably next month. President Recep Tayyip Erdogan has already promised that minimum wage increases will continue to outpace inflation next year, but investors are hoping for a measured increase that aligns with central banks' projections that the inflation rate would fall to 21% by the end of 2025.

Foreign investors will be paying attention to the minimum wage hike, Jamison said. If this figure is around or below 25%, the market will view it as positive for both inflation and interest rates through 2025. In either case, the Turkish market can recover, with or without strangers. There is sufficient domestic liquidity.

Not everyone agrees on this point: Burak Cetinceker of Strateji Portfoys said that the evolution of Turkish stocks in the second half showed that foreign capital inflows were important, given that their outflows weighed heavily on the feeling.

The liquidation in the second half of this year reduced overall foreign capital inflows since the 2023 presidential election to $486 million. The vote attracted funds to Turkish assets amid optimism about a transition to more orthodox policies.

Even though inflation has slowed from its peak of 75.5% earlier this year to 48.6% in October, the rising cost of living remains an urgent and politically sensitive issue for households.

Although inflation may take longer to ease than initially expected, it is unlikely that central banks' next move will be a rate hike, said Emre Akcakmak, senior consultant at East Capital International AB in Dubai. With a rate cut cycle now in sight, Turkish stocks may have bottomed and could start to recover, with current valuations looking more attractive.

Optimism around rate cuts may have become visible, but even when the central bank begins to cut rates, most economists, including those at Morgan Stanley and Deutsche Bank, believe this will not happen. only gradually.

The main challenger for Turkish stocks will remain interest rate instruments, such as money market funds and bonds, said Istanbul Portfoys Deriner.

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