Turkish Stocks Hold Near Record

The BIST 100 stock index were above 14,270 in April, trading near record highs and extending the strong momentum since the start of the year despite the mixed macroeconomic backdrop for equities. Shares of Aselsan, which are by far the heaviest part of the index, topped TRY400 for the first time on record this month to double in value in the only the last four months. The company tracked the rest of the defense sector in NATO amid the constant threat of escalation to the conflicts in the Middle East and Ukraine. Meanwhile, banks were also higher, outperforming other sectors as Turkish investors commonly turn to banks as a shield to high inflation and currency depreciation in the economy. The TCMB held rates unchanged to consolidate the hawkish pivot following the surge in energy prices this year, but the halt in reverse-repo auctions continued to lift overnight rates in the financial system, preventing a further boost for equities.

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.