The Borsa Istanbul 100 in Turkey is rallying, but foreign investors are considering temporarily pulling out of the country. Here’s why.
The Istanbul stock exchange is booming, with the Borsa Istanbul 100 index growing by 20.58% in the year-to-date period. Like many Western-aligned countries, Turkey is experiencing a significant stock market boom, which does not translate well to the country’s economic performance.
According to the Financial Times, the current rally is a ripple effect of the Silicon Valley tech stock boom. US exchanges are growing massively too, with the S&P 500 recently breaking historic highs.
European stocks are rallying too, mostly in the hopes of early interest rate cuts by the European Central Bank.
The tech boom is mainly driven by artificial intelligence and related stocks. The chipmaker Nvidia was the fastest-growing company in history last year, with a 247.93% increase in stock price year-on-year.
Similarly, Finnet Electronic Publishing reports that 7.2 billion Turkish Liras ($233 million) were invested in tech stocks on the Borsa Istanbul 100.
Moreover, fundraising of equity capital has been lower than usual in 2024 compared to the last two months of 2023. Turkish companies managed to raise $320 million in funds between January and February compared to $811 million between November and December 2023. This meant investors sought different investment opportunities.
Erdogan’s policies
The current Borsa Istanbul rally has little to do with Turkish President Recep Tayyip Erdogan’s policies. Indeed, the current state of Turkey’s economy is in urgent need of repair, with inflation approaching triple digits in the country.
January’s inflation reading was 64.86%, the highest level since November 2022.
As a result of the dismal price levels, the Turkish Lira keeps breaking low levels almost every month. At the moment, 1 US dollar is the equivalent of 31.25 Turkish Liras, up from 29.55 on January 1st.
Erdogan won his fourth term as President in 2023. Before then, he refused to consider any increase in interest rates to mitigate inflation and refurbish the local currency. Erdogan infamously fired the central bank’s chairman because he insisted on bringing interest rates up.
Since his latest victory, however, Erdogan had a change of mind. The Turkish Central Bank brought interest rates to a record 45% in January, a 36,500 points jump in a single meeting. However, the bank also signaled an immediate end to monetary tightening.
Foreign investors welcomed the news, though they might decide to temporarily withdraw from the Turkish market ahead of Istanbul’s local elections. They pulled a similar move before the country’s general elections last year in an attempt to push Erdogan out of power and indirectly fix Turkey’s economy.
It didn’t work out then and is unlikely to work out now. However, high interest rates may help the country get back on track, pushed forward by the stock market rally too.
