Turkey stock investors brace for more volatility as lira rallies

After moving in tandem for most of the year, the Borsa Istanbul 100 Index and the lira decoupled this quarter.

A series of interest rate cuts by Turkey's central bank since September halved the value of the lira and boosted the appeal of stocks as a hedge for local investors [File: Moe Zoyari/Bloomberg]

A renewed surge in Turkey’s lira is fraying nerves in the stock market, prompting investors to hunker down for a new era of elevated volatility.

After moving in tandem for most of the year, the Borsa Istanbul 100 Index and the lira decoupled this quarter, with their 30-day correlation turning negative for the first time in three years. A central bank easing cycle that started in September halved the value of the currency and boosted the appeal of stocks as a hedge for local investors, though that attraction has since been dimmed by President Recep Tayyip Erdogan’s measures to shore up the lira.

After Erdogan unveiled his rescue plan for the currency, Turkish equities moved from a record high to a bear market in less than a week, demonstrating the extreme volatility plaguing traders. They’re bracing for more heading into the new year, and looking to swings in the lira as the next key catalyst.

“Turkish stocks have gone through some serious correction,” said Burak Isyar, head of equity research at ICBC Turkey Investment in Istanbul. “Although volatility is likely to continue for a while more, they still have appeal in the medium-term as long as lira stabilizes around these levels.”

The lira climbed as much as 15% on Thursday, trading at 10.5345 per dollar as of 6:34 a.m. in New York. The currency’s advance mostly supported by foreign-exchange sales by financial institutions including state banks, according to two people with the knowledge of the matter.

Meanwhile, the Borsa Istanbul 100 Index reversed gains and weakened as much as 4.3%. The benchmark was set for the steepest five-day loss in more than two decades, and closed in a bear market on Wednesday. Trading was automatically halted repeatedly this week, with high levels of margin trading and increased demand for collateral exacerbating the move.

The total size of margin calls spiked to as much as 1.4 billion liras ($124 million) on Monday from 80 million liras at the beginning of the month, when the equity benchmark was in the midst of its longest winning streak in at least three decades.

“We expect the market to stabilize once the margin call requests are over,” Yunus Kaya, head of research at Istanbul-based brokerage Alnus Yatirim, said by phone on Thursday. “Nevertheless, we see volatility continuing.”

The rout comes as Erdogan’s measures, which promised investors protection from the currency’s gyrations, sent the lira surging. That removed a key catalyst behind the Turkish equity rally over the past three months.

The measures are intended to mitigate retail investors’ demand for dollars and bring an end to three months of turmoil for the nation’s currency. Yet they are also raising concern over their impact on the nation’s fiscal position, with a measure of Turkey’s debt risk holding near the highest levels since the pandemic began in 2020.

–With assistance from Asli Kandemir.

Source: Bloomberg