Local Investors Make Their Mark, Lifting Turkey Small-Cap Stocks

(Bloomberg) -- In Turkish stocks this year, small is beautiful, thanks to local investors.

Even as international fund managers have walked away from the market in recent months, domestic buyers poured in, leading to a homegrown rally that's sent shares of smaller companies soaring.

A gauge of all Turkish stocks excluding those in the benchmark Borsa Istanbul 100 Index has soared 61% this year in local-currency terms. The Borsa Istanbul 100, home to the larger companies favored by foreigners, meanwhile, is up only 18%.

Conditions have been ripe for buying by locals, and thus outperformance by small-capitalization companies. Turkey's central bank has cut interest rates by 10 percentage points since July, diminishing the lure of deposit accounts for domestic investors and giving fuel to the economy, even if the recovery has been uneven. Inflation has held in check, and the currency has been relatively stable.

Turks “would rather put their money in the small-sized companies' shares which they at least have familiarity,” said Mehmet Gerz, chief investment officer at Ata Portfoy, who recently increased his holdings of smaller companies.

Despite the lira's subdued volatility in the second half, it's still down 8% for the year, reducing the return of Turkish stocks when converted to dollars and thus making them less appealing to foreign investors. Locals don't need to worry about currency crashes curbing their gains when they want to cash out.

“In the past, it would be foreigners driving a rally in Turkish stocks, and the locals would just jump on the boat and broaden the rally,” Gerz said. “But now, foreign investors don't seem likely to pour a lot of money in Turkish equities yet.”

Read: Turkey Investors Use Moments of Calm to Extend Equities Rally

The data supports Gerz's view: In the first half of the year foreign investors bought a net $851 million in Turkish equities, according to central bank data. That compares with outflows of $382 million in the second half through Nov. 22, when the main equities gauge rallied 11%, suggesting foreign investors were selling into strength.

What's more, despite the net foreign inflows this year, non-residents' holdings of Turkish stocks are hovering near a 10-year low.

From geopolitical concerns to macro economic worries, there have been many reasons that kept foreign investors at a distance.

Turkish lawmakers' steps to limit the damage in the country's financial markets since the currency crash in 2018 also have contributed to foreign investors' hesitation. They're unlikely to come rushing back to Turkey until debt-rating companies turn more positive on the country, Gerz said.

Read more: Soaring Second Half for Turkish Stocks Obscures Sanctions Risk

“It will take a few ratings upgrades before long-term foreign money comes back to Turkish stocks and markets,” he said.

--With assistance from Fercan Yalinkilic.

To contact the reporter on this story: Tugce Ozsoy in Istanbul at tozsoy1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, ;Onur Ant at oant@bloomberg.net, Phil Serafino

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