Outperforming the Japanese Stock Market... Quietly Strong Turkiye Stock Market

Up Over 20% This Year
Top Performer Among MSCI Tracking Stocks
Massive Inflows Into Stocks Due to Hyperinflation Impact

This year, the Turkish stock market has shown the steepest rise among global stock markets. It even surpassed the Japanese stock market, which broke its all-time high set during the 1989 bubble economy for the first time in 34 years. Ironically, analysts say that the biggest factor driving this rally was Turkish investors pouring large sums of money into the stock market 'reluctantly but necessarily' amid hyperinflation.

According to Morgan Stanley Capital International (MSCI) on the 29th, the 'MSCI Turkey Index (USD)', which tracks the Turkish stock market, rose more than 20% from the first trading day of this year until the 27th. This is the highest increase among all country stock markets tracked by MSCI worldwide. The 'iShares Currency Hedged MSCI Japan ETF (ticker: HEWJ)', which tracks the Japanese stock market, rose 15.6%, ranking second. Even the Japanese stock market, which has been setting new records this year, is considered to have underperformed compared to the Turkish stock market's rise. MSCI's global stock market index increases are calculated based on local currencies converted into US dollars.

Experts attribute the double-digit rise in the Turkish stock market this year to the resurgence of Turkey's Consumer Price Index (CPI) since the second half of last year. According to the Turkish Statistical Institute, Turkey's CPI last month recorded 64.68% year-on-year. The brutal inflation has continued to rise for seven consecutive months since July last year (47.83%). Emre Akmak, an emerging markets fund manager at East Capital, explained, "Turkish investors knocked on the stock market door to defend their assets." Typically, when high inflation occurs, the returns on cash-equivalent assets such as bank deposit interest rates lag significantly behind inflation, causing asset values to decline.

There is also an analysis that the AI technology boom led by Nvidia has spread to the Turkish stock market. According to Finnet Electronic Publishing, a financial data provider, $233 million flowed into funds investing in major Turkish technology companies this year. Last year, these funds saw a net outflow of $27 million.

Additionally, the return of foreign investors was cited as a factor in the Turkish stock market rally. According to the Central Bank of Turkey, foreign investors purchased about $213 million in the Turkish stock market this year. This is because the undervalued Turkish stock market is considered attractive for buying. While the price-to-earnings ratio (PER) of the MSCI Emerging Markets Index is 12 times, Turkey's representative index, the Borsa Istanbul 100 Index, stands at only 4 times.

However, experts foresee high short-term volatility as local elections are scheduled in Turkey on the 31st of next month. This is because the ruling Justice and Development Party (AKP) prefers stimulus measures and interest rate cuts. If they perform well in these local elections, there is a possibility they could oppose the plans of Mehmet ?im?ek, Turkey's Minister of Finance, who aims to accelerate quantitative tightening. Since the Central Bank of Turkey raised the base interest rate for the first time since 2021 in June last year, it has increased it to 45.0% as of January.