The benchmark ISE National-100 index tumbled 7% in the trading week beginning February 26 and followed up with a 2% plunge in Monday trading. While Turkey's was far from the only market to suffer last week, the precipitous drop triggered memories of May 2006, when another general sell-off in emerging-markets equities hurt the Istanbul bourse harder than others.
Turkey's swift and effective official response to last spring's drop, a decisive hike to interest rates, left investors comforted with the government's ability to manage the Turkish economy and helped instigate a slow and gradual recovery in equities prices and the lira. There had been lingering doubts due to the slightly Islamist tinge of the ruling AK Party. A repeat performance may be necessary in the coming weeks to shore up investor confidence.
In Monday's trading, the ISE National-100 dropped 2%, with more than nine shares falling for every one that advanced. The index had slumped as much as 3.2% before a late-afternoon rally. Turkiye Is Bankasi, the index's biggest financial-services stock, fell as much as 4% before ending the day down 1.6% to TL6.05, its lowest since January12. Akbank, the next-biggest bank on the index, sank 4.3% to TL8.90, the lowest in five weeks. The two lenders account for some 18% of the ISE National-100.
Financial-services stocks also led last week's drop, having dropped an average of 7.8% for the week. Industrial shares slid 6.2%, and services concerns slumped 3.7%.
Optimists may feel encouraged by Monday's trading because even before the late-day rally that pared losses, the drop was smaller than that of the Morgan Stanley Emerging Markets International Index, the benchmark for emerging markets. Indexes in India, Russia, Taiwan, Malaysia and the Philippines all tumbled more than 3%.
The Morgan Stanley emerging-markets index had plummeted 3.9%, putting it on target for the biggest one-day drop since last June's emerging-market sell-offs. That brought index's four-day drop to 6.7%, erasing gains made in 2007.
Turkey led last year's rally, but its stocks, this time, appear to be recovering faster than in most emerging markets.
The country's performance may be seen as a sign of increased investor confidence in capital markets.
That is perhaps because investors have more confidence in Turkey's central bank. The lender boosted interest rates last June and July a hefty 4.25% to 17.5% to fight inflation. The hikes came as the lira plunged 23% from late May to late June.
The Turkish lira sank to its lowest in three months, to 1.4586 per US dollar, in Monday afternoon trading. The local press reported that all foreign currencies gained against the lira. The Turkish currency dropped 3.7% in the last week of February. As with stocks, the drop has been smaller thus far than in last spring's emerging-market asset sell off. The lira plunged 23% from May 5, 2006 to June 23, 2006.
"Our retail and corporate customers are selling a huge amount of liras and we don't have any idea where the global market is going," Levent Guven, head of foreign exchange trading at Turk Ekonomi Bankasi in Istanbul told Bloomberg News. "As a bank, we prefer to adopt a defensive position and keep out of the market."
Tuesday morning trading was calmer, as Istanbul's investment community seemed to be waiting for developments in other markets for guidance. Analysts at Oyak Securities expected a rebound, in part because of improving market sentiment in Asia-Pacific markets. An earnings announcement may also have fuelled some optimism. Bank Asya said net income surged 45% higher in 2006 to $102m. The jump in profits was higher than some investors had expected. Oyak told clients in an electronically-distributed research note that the lender's net fees and commissions income led to the extra profits. Garanti Bank reported a 2006 net income of $815m, up 45% from 2005's net income.
If the negative trend continues, a continued sell-off could further damage the lira and
re-ignite inflation. That is because Turkey pays for most of its imports, including almost all of its oil needs, in dollars, so when the lira is weak it costs more to import the same goods. Consequently, a weaker lira means more inflation risk.
The next domino in line would be Turkish bonds, as inflation erodes the value of the fixed returns offered by debt instruments. Bonds typically rise when stocks fall because their fixed returns look better and safer in comparison to sometimes-volatile equities, but bond gains were limited during the recent stock sell-off on the ISE, perhaps because investors are anticipating inflation.
The Turkish central bank said on Monday that it expected inflation for a third consecutive month in March, but that inflation rates would decline in the second quarter of 2007.