In a notable development, the Turkish stock market has started showing signs of recovery, driven by increasing expectations among fund managers of an imminent interest rate cut, following a period of weak performance since the second half of this year.
Decline Precedes Recovery
The Borsa Istanbul 100 Index (BIST 100) witnessed a decline of approximately 10% since the end of June, as high-interest rates diminished the appeal of stocks compared to lower-risk asset classes. Net foreign outflows from the Turkish market reached $2.5 billion this year, fueled by substantial sell-offs since May.
However, early recovery signals emerged this month as the Central Bank of Turkey hinted at the potential initiation of a monetary easing cycle soon.
Persistent Inflation and Investor Concerns
According to Tufan Deriner, managing partner at Istanbul Portföy, inflation has remained more persistent than the market anticipated, exacerbating foreign investor outflows. Nevertheless, Deriner believes the worst may be over, with an interest rate cut possibly acting as a new market catalyst.
Bear Market and Corporate Challenges
Despite a 30% gain in Turkish equities since the beginning of 2024, the market entered bear territory in October, as rising prices and inflation eroded local corporate profits, increasing the appeal of alternative investments such as lira deposit accounts and money market funds.
Since June 2023, the Central Bank of Turkey raised interest rates from 8.5% to 50%. However, in November, it signaled a potential rate cut in response to slowing inflation.
Positive Outlook Ahead
Thea Jamieson, managing director at Sheng Global Investment, views an interest rate cut as a major turning point for attracting foreign investments, expressing optimism about Turkish stocks in 2025.
The upcoming adjustment of the minimum wage, expected next month, could also serve as a significant indicator. Investors hope the increase aligns with inflation forecasts, boosting confidence in Turkey’s economy.
Continued Challenges Despite Optimism
Although inflation slowed to 48.6% in October, down from its peak of 75.5%, high living costs remain a significant challenge for Turkish households. With a potential interest rate reduction cycle on the horizon, current equity valuations appear more attractive, paving the way for a gradual market recovery.
Gradual Path to Rate Cuts
Despite growing optimism, economists, including those at Morgan Stanley and Deutsche Bank, predict that interest rate cuts will be implemented cautiously and gradually, reflecting the Central Bank’s careful approach to addressing inflation and economic challenges.
