Turkey: Exchange growth on the horizon

While Turkey’s stock market, like most around the world, has witnessed reversals over the year so far, especially in recent months, it has remained a solid long-term investment, out-performing its emerging market peers.

A key sign of international confidence in the economy came in mid-September, when Standard & Poor’s upgraded Turkey’s local currency rating to BBB-. The upgrade led to a flurry of interest that saw Turkish stocks trading 5% higher than the days before the announcement.

Steps taken by the authorities to curb short selling and recent decisions by major international banks to upgrade their assessments of the market’s prospects have also helped boost international confidence, while rising initial public offering (IPO) levels show signs of remaining strong into next year.

Against this backdrop of solid growth, the Istanbul Financial Summit (IFS) on September 28-29 brought together economists and bankers from around the world to discuss the future of the Turkish economy and the viability of the city as a regional, if not global, financial centre. The consensus of the conference was largely positive, with speakers citing the Turkish economy’s 9% growth in 2010 as a sure sign for optimism, and some saying that the ratings upgrade has been long overdue.

However, there are a number of challenges still facing the economy. As has been the case with stock markets worldwide, the Istanbul Stock Exchange (ISE) has had a difficult 2011 so far, thanks largely to eurozone problems and to a global markets slump in late August sparked by the downgrading of US credit. As of September 7, the ISE National 100 index, representing the 100 largest companies by capitalisation traded on the exchange, was down 19.5% on the beginning of the year, slightly underperforming the MSCI Emerging Markets index, which stood down 14%.

The slowdown has been felt almost across the board, with most sectoral sub-indexes down on the start of the year, although technology stocks have resisted the pressure – the ISE technology and the ISE information technology indexes gained 7.7% and 19.4%, respectively, since the start of the year. Other sectors outperforming the market include textiles, food and beverages, telecommunications, industrials and the chemical industry, all of which were down less than 10% for the year.

Banking, tourism and electricity stocks performed roughly in line with the market average, while insurance and transportation shares (the latter of which have been hit hard by high fuel prices) have been among the worst performing, down approximately 36% and 40%, respectively.

Despite recent short-term fluctuations, the ISE has proven to be a strong long-term investment. The ISE National 100 index on September 7 had gained approximately 44% over the last five years, compared to around 29% for the MSCI Emerging Markets Index.

The authorities have also moved to boost short-term confidence in the market. The Capital Markets Board said on August 11 it would investigate claims that speculative short selling had sparked the slump. The board also joined other countries in trying to reduce the practice by raising the equity amount required to carry out a short sale from 50% to 70%. It also said it would severely punish anyone found to have engaged in naked short-selling, though it did not go as far as South Korea and Greece, which have imposed temporary bans on short sales altogether.

The measures seem to have helped to restore confidence, with the market showing signs of a recovery. As of September 8, the ISE National 100 had risen 13% from its lowest point in August. The stock exchange was also boosted in early September when a number of major international banks, including Citigroup, Deutsche Bank and Morgan Stanley, upgraded their recommendations for the Turkish market from neutral to overweight.

The contraction in the markets has failed to dent deal-making activity on the exchange so far. As of early September, the ISE had witnessed 21 IPOs – one short of the total for all of 2010 – since the beginning of the year, raising total revenues of TL1.2bn ($677m). According to the ISE, six more IPOs are in the pipeline. These include a share offering by the state-owned Halkbank’s property investment trust arm Halk Property Investment Partnership (Halk Gayrimenkul Yatırım Ortaklığı, HalkGYO) and the delayed float of low-cost airline Pegasus.

Other companies are planning further listings in the near future but have not yet officially registered these with the ISE. For example, the energy minister, Taner Yıldız, announced in mid-August that the government intended to start work on an IPO for state oil and gas exploration firm Turkiye Petrolleri (TPAO) in 2012. Around the same time, it was reported US private equity firm Carlyle was considering a sale or IPO of its stake in Turkish hospitals group Medical Park that could be worth several hundred million lira.

In July Finansbank announced its owner was considering floating up to a 20% stake in the bank early next year. That same month, major Turkish food producer and distributor Ulker announced its intention to list four units on the exchange over the next two years.

Viewed together, Turkey’s over-performance of several sectors in the short term and its above average long-term performance, as well as the rise in IPOs on the market, indicate a bolstered and vibrant exchange on the cusp of major growth, and confirms the assessments of many at the IFS.