Turks pile into 'horse race' stock market as foreigners pull out

(Reuters) - Turks have been snapping up local stocks like never before, with their ranks swelling by more than a third so far this year, as high inflation and cheap valuations convince them to abandon other investments and fill a gap left by foreigners.

FILE PHOTO: A man checks his receipt after changing money at a currency exchange office in Istanbul, Turkey, August 4, 2020. REUTERS/Murad Sezer

The number of local investors in the Turkish stock exchange jumped 37% to 1.67 million since the beginning of the year until the end of August, according to data from the Central Securities Depository of Turkey.

Since the start of the year, the value of stock portfolios held by domestic investors has risen by a third, while those foreign-owned declined by 4.2%, Reuters calculations based on the data show.

Graphic: Turkish investors flock to stock market:

Analysts, investors and investment advisers say negative real interest rates on lira deposits have helped nudge people into stocks for the first time on such a scale. Some say it offers the market welcome support, but others worry it can make it more volatile.

Traditionally, most Turks would keep their savings in dollar and gold, and it was foreign investors who have underpinned the stock market and served as a source of hard currency for the economy.

But foreigners have been pulling out since the 2018 currency crisis triggered rule changes that made it harder to sell short or hedge against the weakening currency, while real returns on savings turned negative this year following a nearly year-long monetary easing cycle.

Even after a surprise tightening last week, the central bank’s 10.25% policy rate remains below annual inflation at 11.77%.

“Other investments bring very little profit due to low interest rates (so) investors are seeking other higher-income opportunities,” said Turgay Ozaner, managing partner at Istanbul Asset Management.

One domestic investor, who requested anonymity, said low rates convinced her to put the money from a car sale in stocks with a plan to upgrade soon with the profits.

“The money I had was constantly depreciating due to increasing inflation and the forex rate,” she said.

Turkey’s blue-chip index .XU100 was down 2.2% so far this year at Tuesday's close after some wild swings during the coronavirus pandemic, while the lira has lost nearly a quarter of its value against the dollar.

Graphic: Domestic investors' new darling:

Foreign ownership of Turkish equities has dipped below 50% from 65.6% three years ago, and foreigners pulled $5.61 billion in funds so far this year, according to central bank data.

One result of the exodus are discounted valuations, which help woo domestic players. The MSCI Turkey Index’s dollar-denominated price-earnings (PE) ratio stood at 8.78 at the end of August, well below its equivalent for emerging market peers at 18.20.

“Turkish stock market is very cheap at the moment,” says Atilla Yesilada, economist and political analyst and commentator. “It deserves some kind of discount but this discount is one of the highest ever.”

Improving online trading technology offered by banks and other firms, combined with coronavirus stay-at-home orders, also played a role drawing Turks to the market, analysts say.

Tunc Satiroglu of Kanal Finans said individual investors have high hopes of big profits but their “gambler mindset” leaves them exposed to potential heavy losses.

One investor, who recently began buying stocks said he joined a WhatsApp group where 250 members swap stock tips. “It is like horse-race betting, and all those small investors do not have a slightest idea about the economy or stock market.”

Reporting by Berna Suleymanoglu, Canan Sevgili, Halilcan Soran and Oben Mumcuoglu in Gdansk; Additional reporting by Ezgi Erkoyun in Istanbul; Editing by Jonathan Spicer and Tomasz Janowski