Last year alone, the benchmark index for the stock market in Istanbul, the ISE National 100, posted an increase of 32.3% (in EUR terms). This year, however, Turkish stocks have not numbered amongst the winners in the EM universe, as the leading Turkish index has lost around 5% since January (as of May 26).
Even though few stock exchanges in the emerging markets have done worse than Turkey in 2011, which has been a generally poor year for the EM anyway, there are many factors pointing to a continuation of the success story in Turkey over the medium to long run. Turkey is one of the fastest growing economies in Europe. In 2010, dynamic economic growth resulted in a 9.2% expansion of GDP and for 2011, RCM is projecting growth of around 5%.
Important supporting factors for Europe’s sixth largest economy include rising wages and the related growth in domestic consumption among the country’s young population (73.5 million in 2010). Per capita income has surpassed the level of USD 10,000 which is so important in the emerging markets. Furthermore, public debt levels are declining and the budget deficit target for 2011 is just 2.8%. The positive developments are supported by privatisation revenues and foreign investment, which have been increasing continuously since 2009.
Inflation concerns
At the same time, Turkey is facing rising inflation (in part due to higher commodity prices). Even though the annual rate of inflation is currently on a steep downtrend, in the coming months there is a risk of a sharp rise in inflation rates.
Turkey’s dependency on commodity imports and the very robust, sustained domestic demand continue to be factors which pose a threat to long-term price stability. The central bank’s latest inflation forecast for Q2 2011 was published at the end of April and featured an increase in inflation expectations, in particular due to the higher oil price.
The Turkish lira continues to be the weakest currency in the region, which is fine with the country’s central bank. If the current world market developments in oil and food prices continue, the outlook for inflation in Turkey could deteriorate very quickly again. In turn, this could prompt a response by the central bank, which has lowered its key rate twice in recent months, but it also create the potential for a stronger currency again as a result.
Thus, it is still a difficult balancing act between avoiding economic overheating and not snuffing out economic growth. So far, the central bank has been successful, which fosters optimism going forward.
Following Russia, Turkey is the most important equity market in the region. Daily trading volumes on the main exchange in Istanbul, the International Stock Exchange (ISE), amount to USD 1 to 2 bn. Non-resident investors hold between 65% and 80% of the so-called “free floats”.
Stock prices
Stock prices on the Istanbul exchange have trended higher in recent weeks, but these increases were probably primarily just a reaction to the earlier sub-average performance by Turkish stocks. Over the short to medium term, there are hardly any triggers for sustained increases in share prices, and thus we do not expect to see any major gains in Turkey for the time being.
Banks are one major source of support for the Turkish equity market. The banking system is seen as being very stable and the level of public debt is relatively low (2010e: 42.8% of GDP). Above and beyond this, Turkey plays an important mediating role between Europe and the Middle East.
It profits from its excellent relations with the rich Gulf countries and is simultaneously the most important trade partner for the European Union (and a candidate for EU accession since 2005).
The upheaval and renewal in North Africa and the Middle East is particularly beneficial for Turkey, which can utilise its traditional ties to the Arab countries.
As a trade partner and gateway to the European Union, Turkey will be able to profit more than average from the changes in the region, which should provide excellent support for stock prices over the medium to long term as well.
