Turkey’s stockmarket rally has come to a sudden halt

After a 53% surge last year, Turkey’s stockmarket has suffered an abrupt reversal. On Monday it slid by 4.2%, the worst daily performance in 17 months. One reason was a report questioning the rally in banking stocks, which account for over half the index.

Credit Suisse warned that new consumer protection laws would crimp banks’ income. Meanwhile, some had been expecting a credit-rating upgrade to investment grade, a major milestone for an emerging market, from Moody’s, but this failed to materialise.

This setback should remind investors that equities have come “too far, too fast”, says Tim Ash of Standard Bank. The price-to-earnings ratio is now above the ten-year average. The index is vulnerable to shifts in global risk appetite because foreign investors dominate it, while the economy is also unusually dependent on foreigners’ whims. Banks’ external debt is high and rising; they’ve been turning to the wholesale market for funds. Throw in a recent rise in bad loans amid a recent economic slowdown and “further gains in banking stocks would be hard to justify”.

The current account deficit has decreased, but only to 6.5% of GDP. So Turkey is in debt to the rest of the world and has to borrow from abroad to fund growth. That leaves it vulnerable to external borrowing conditions, especially if the deficit is financed largely with short-term capital flows such as stock or bond investments, rather than longer-term capital flows such as foreign direct investment.

Short-term financing covers almost 80% of the deficit in Turkey’s case, says Hurriyetdailynews.com. So money can easily flow out of the economy in the event of further global jitters, implying a rise in interest rates to make the lira more appealing, slowing growth further. Given this, and scope for global sentiment to sour, steer clear of Turkey for now.

MoneyWeek magazine

Latest issue:

Magazine cover
Party's over for Putin

The only portfolio safe from Russia's rout

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Hedge fund manager Hugh Hendry: 'It felt like the sun rose only to humiliate me'

In a series of three short videos, Merryn Somerset-Webb talks to Hugh Hendry, manager of the Eclectica hedge fund, about everything from China to the US, Europe, and Japan.

Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.

19 December 1932: BBC World Service begins

The first royal Christmas message by George V gave the fledgling World Service an early boost six days after it was founded in 1932.