Turkish Stocks Decline from Record

The Turkish lira weakened to a record low 44 per USD in March, as the Central Bank of Turkey was forced to intervene in foreign exchange markets to maintain the predictable devaluation pace amid the outbreak of a war in the Middle East. Traders noted that the central bank sold more than $8 billion in foreign exchange since the start of the month to prevent a slide in the lira as the global pivot away from riskier currencies drove the dollar to surge. Markets sold liras despite expectations that the fresh inflationary risks from war in the region, especially due to a surge in energy prices, will drive the central bank to halt its rate-cutting cycle. Additionally, the TCMB raised its overnight reference rate by 300bps to almost 40% to prevent a sharper lira selloff. On top of that, confidence on the suspension of the rate-cutting cycle was attributed to a bounce in the headline inflation rate during February to 31.5%, its first increase since September.

Turkey's BIST 100 stock index sank to the 13,100 mark in early March from the record-high of 14,339 from February 16th, tracking the sharp pressure for all Turkish asset classes as the outbreak of war in the Middle East drove investors to flee toward safe haven assets. Iran exchanged strikes with multiple neighbors in the Middle East that are US allies following US attacks since the weekend, risking a prolonged war in the region and impacting key energy infrastructure that sent oil and gas prices soaring. The events pressured emerging market equities across the globe. Banks were sharply lower, with Garanti, Koc, and Akbank dropping between 10% and 18% from their record highs recently, with pressure on the sector magnified by a sinking lira and outlook of response of tight monetary policy from the TCMB. On the other hand, relative support for Aselsan prevented a greater pullback for Turkey's benchmark index.

Turkey’s BIST 100 stock index surged to 13,800 in February, a record high, on strong support from defense intelligence and the financial sector, as investors assessed whether the macroeconomic backdrop for the year would continue to favor equities. Aselsan shares were nearly 300% higher from the previous year amid higher defense spending from NATO members due to heightened geopolitical tensions in both Europe and the Middle East. Banks also outperformed in the recent quarters on the stability of domestic inflation, despite remaining high, spurred by credit activity following the prolonged period of unorthodox monetary policy by the central bank. The predictable decline in the lira has also allowed investors to use riskier assets such as equities to protect themselves against inflation. The TCMB cut its benchmark rate by 100bps last month, less than expectations of a 150bps cut, but reiterated that its baseline scenario sees underlying inflation continue to slow this year.