Turkish Investors Shift from Stocks as Interest Rates Rise
The investment strategy was straightforward: with central bank interest rates in single digits and inflation soaring at 80%, holding bank deposits was clearly a losing game. By investing in stocks, Turks hoped to preserve their capital from rapid depreciation.
This shift led to substantial inflows into Turkey’s stock market, transforming the Borsa Istanbul All Shares Index into a standout performer, soaring 440% since the end of 2021. The enthusiasm was palpable, as the number of individual equity accounts tripled to 8.6 million by last October, meaning that one in three Turkish households had invested in stocks.
However, the momentum for equity investors is fading as President Recep Tayyip Erdogan has recently pivoted to more orthodox economic policies following his reelection last year. His economic team has raised interest rates to 50% in an effort to combat inflation, indicating that high rates are likely to persist for several months.
Consequently, the interest rate on three-month lira deposits surged to as much as 69% in April, undermining the appeal of stocks.
“Fortunately, I exited the market just in time two months ago,” said Betul Seckin, a 32-year-old software specialist from Izmir, located about 480 kilometers southwest of Istanbul. “I moved all my funds into lira deposit accounts.”
Seckin is not alone in this sentiment. The Borsa Istanbul All Shares Index declined by 6.8% in the third quarter, while the benchmark MSCI Emerging Markets index rose by 4.6%. Additionally, the number of Turkish equity accounts is on the decline.
The promise of a return to policy orthodoxy, influenced by Treasury and Finance Minister Mehmet Simsek, has attracted new inflows into Turkey’s assets, fueled by optimism that the country’s misaligned economy will stabilize.
Yet, while debt instruments have gained traction, non-resident investors have been gradually withdrawing from Turkey’s stock market, selling a net $3.2 billion in equities since mid-May, according to official data. Initially, domestic funds absorbed these outflows, masking the trend until the third quarter.
Time for ‘Normalization’
The decline in shares of small and medium-sized enterprises (SMEs), favored by domestic investors with shorter time horizons, began months before the broader market felt the effects. An index tracking newly listed companies, once a favorite among retail investors, is now underperforming compared to the broader index for the first time in six years, while the SME index has lagged since March.
Turkey’s Capital Markets Board, the market regulator, has consistently warned inexperienced retail investors against following advice circulating on social media, urging them to rely on licensed professionals instead.
“Many retail investors developed an unrealistic belief that stocks would always rise, as this had been the trend for several years,” noted Evren Kirikoglu, founder of Istanbul-based consultancy Orca Macro. “When faced with reality, they are struggling to accept it.”
Burak Cetinceker, a fund manager at Strateji Portfoy in Istanbul, remarked that as interest rate-based investments became viable options for hedging against inflation, confidence in Turkish stocks began to diminish. Slowing economic growth and weak corporate earnings are further reinforcing this “natural cycle.”
“The stock market was the place to be back then,” Cetinceker stated. “What we are witnessing now is simply a normalization.”