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Turkey bucks global trend as companies ‘too good to be ignored’

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The Turkish stock market has been rocked with allegations of fraud in recent weeks, adding to the volatility driven by the country’s unorthodox macroeconomic policies.

But despite the fraud investigation, related to transactions of banking shares on Borsa Istanbul, the country’s stock market, the tanking currency and the president’s insistence on cutting interest rates to fight inflation, the stock market’s 100 index hit a new record last month.

The iShares MSCI Turkey ETF [LON:ITKY] is now up 63% from its 52-week low of USD15 per share.

There are several reasons for the strength of the Turkish stock market this year, whizzing past the S&P 500, which is down 20% year-to-date. Over one year, Borsa Istanbul 100 is up 87% to 3,550 points, with groups like Turkish Airlines [IST: THYAO] and Koc Holdings [IST: KCHOL] seeing their share price increase 495% and 129% respectively.

President and Nation not the same

Many market participants have been too focused on geopolitics and equated their outlook on the Turkish market with their view on the president and his economic policies, according to Matthias Siller, head of the EMEA equities team and co-manager of the Barings Eastern Europe strategy and Barings Emerging EMEA Opportunities fund.

While everyone agrees that the monetary policies in place in Turkey are unsustainable and not good for the country, or its people, the underlying company fundamentals are too good to be ignored, Siller believes.

“It is the fact that a lot of companies had learned to live with this volatile backdrop and isolated themselves from severe impact by becoming world class operators in their specific niche,” he added.

He also pointed out that as sentiment turned negative, a value play emerged, particularly in the manufacturing and tourism sectors, which have fared better than other countries in the customs union. This is partly because the war in Ukraine hasn’t impacted Turkey’s energy supplies as much as other places due to a long term contract in place with Russia and a broader portfolio of gas imports from other suppliers.

Energy Security

“Relatively speaking, on the availability of electricity and energy, Turkey is the best place now in Europe. Lower energy prices are important when you talk about manufacturing and the chemicals sector. You have security of supply. Not only can you run a number in your predictions, you can be assured that the amount of energy you need will be supplied by the utility,” he said.

Turkey has seen an exodus of international investors, leaving behind only specialised investors and ETFs alongside domestic investors. Currently, the share of foreign investors in the stock exchange is about 33%.

In Siller’s opinion this is nearly rock bottom for international ownership of Turkish shares, protecting the stock market from any fire sale that may take place in response to negative policy news. Meanwhile, Turkish investors have been increasingly putting more money into the stock market as they suffer from a lack of alternatives, with the property prices in the country skyrocketing as well.

And while all these factors have helped boost the Turkish stock market, it is by no means without its problems. Last week, authorities arrested five people for allegedly making high-volume transactions in banking stocks, artificially raising prices. Meanwhile, inflation continues to soar, surpassing 80%, and the central bank keeps cutting interest rates. This is all in the run up to what could potentially be highly contentious elections next year.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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