Turkish market outlook: Investors will not leave “safe havens”

Article by Zeynel Balci, finance olumnist of Hurriyet Daily

As deposit interest rates rose following the Central Bank of the Republic of Türkiye’s (TCMB) rate hike, efforts to hedge against inflation came to the forefront. Even though there is a withholding tax on deposit interest, it still offers a “risk-free” return. The key question is: how long can interest rates remain at this level? However, there is market expectation of a rate cut from the TCMB after June. High interest rates are also a serious alternative to the stock market and are problematic for the real economy. On the other hand, a significant portion of investors still remain focused on gold.

As markets remain volatile, declining risk appetite has pushed safe-haven assets to the forefront. Savers and investors, adopting a defensive stance, turned to risk-free or lower-risk alternatives. Gold, foreign currency, and interest-bearing instruments came to mind first as investment tools.

Interest in Stocks Rose Temporarily with Earlier Rate Cut, Then Reversed

In recent months, with the onset of the TCMB’s rate-cutting process, there was a shift toward the stock market and the BIST100 index rose. At later stages, however, with the TCMB’s rate hikes, investors began to change course again. As long as rates remain high, this defensive posture will likely be maintained. While deposit interest rates rose with the TCMB’s rate hikes, efforts to hedge against inflation became more prominent.

EXPECTATION OF A RATE CUT IN JUNE

The current interest rate also provides a real return. At present, annual inflation stands at 38.1%. Due to exchange rate pass-through effects, a slight increase is still possible. However, expectations for annual inflation are forming around 30%. Both bond and deposit interest rates are above this level. Despite the withholding tax on deposits, a “risk-free” return exists. The question of how long rates can remain this high becomes important.

Market talk of a potential rate cut from TCMB after June is increasing. However, when a rate decision is made, the prevailing conditions in domestic and international markets will be critical. High interest rates are not only a key reference point for investment decisions but also a serious alternative to the stock market. Likewise, the same applies to the real economy. It suppresses consumer demand, slows economic growth, and raises costs through higher loan rates. This equates to supply-side inflation. Ankara Chamber of Industry (ASO) President Seyit Ardıç recently stated: “With loan costs exceeding 60%, it’s not even possible for industrialists to continue production, let alone invest.” In short, lower interest rates would benefit everyone. There’s no doubt about that—but the timing and mechanism remain uncertain.

GOLD REMAINS ACTIVE

Meanwhile, gold prices continue to be active. A significant portion of investors still focus on it. Gold, along with real estate and foreign currency, is one of the traditional investment vehicles. So far, we haven’t seen a shift from this area to riskier investment tools.

According to TCMB data, since March 14, domestic residents’ foreign currency deposits have increased by approximately $17 billion. Yesterday, the TCMB enacted some measures to support a transition to the Turkish lira. In real estate, the upward momentum seen last year has slowed. In the January–March period, monthly sales hovered between 110,000–112,000. With the interest rate hike, a stagnant trend is likely to continue for a while.

Waning Interest in Borsa Istanbul Is Natural Under These Conditions

Given these conditions, a decline in interest toward Borsa Istanbul is normal. Domestic political tensions, the ongoing need for expectations to drive positive pricing, lack of participation from both local and foreign investors, indifference to gains in foreign markets, and weak Q1 2025 earnings reports have all pressured the stock market. It has faced significant selling and retreated to major support levels, appearing cheap and lacking a premium. However, like the saying “cheap meat makes a tasteless stew,” this appearance is still not enough to attract buyers.

WATCH THE EARNINGS REPORTS

In the Q1 earnings reports currently being released, the effects of not only inflation accounting but also the slowdown in the real economy must be considered. Many companies reported losses. Major industrial companies and conglomerates experienced significant profit declines or losses. Profitability remains primarily in the banking sector. The lack of inflation accounting in bank earnings reports should also be considered. Additionally, rising exchange rates and interest rates bring a cautious outlook for the sustainability of banking profits.

FOREIGNERS FINALLY STARTED BUYING

After weeks of heavy selling, foreign investors have finally begun buying again. According to TCMB data, in the week ending April 25, foreign investors purchased $92 million in stocks and $476 million in government bonds, totaling $568 million in net inflows. In the previous week, they bought $269 million in stocks but sold $970 million. Compared to the sales made since March 19, these recent purchases are still small. It’s too early to say “foreigners are buying again.” However, it is significant that, after weeks of net selling, they have returned to net buying. Meanwhile, the decline in TCMB reserves continues. In the week of April 25, gross reserves fell by $5.5 billion to $141 billion, while net reserves excluding swaps dropped to $16.4 billion.

APRIL INFLATION TO BE ANNOUNCED TOMORROW

All eyes will be on tomorrow’s announcement of April’s inflation figures. As the TCMB hinted in its latest meeting statement, it is expected to be “somewhat” high. Market expectation is for monthly inflation to be slightly above 3%. In Istanbul, retail prices rose by 3.21% and wholesale prices by 1.46% compared to the previous month. The rise in foreign exchange rates and frost events due to cold weather, which impacted food prices, have pushed inflation expectations higher. However, this situation is unlikely to trigger another TCMB rate hike. The previous hikes were driven by other developments.

 SEARCH  FOR A BOTTOM CONTINUES IN THE STOCK MARKET

Despite attempts at rebound buying, the downward trend and search for support in the stock market continues. The first support levels are at 9,050–9,000, and these points have become significant for the short term. Otherwise, the next support and holding levels may be found at 8,870 and 8,560. On the upside, the first resistance levels are seen at 9,300 and between 9,400–9,500. To speak of a strong recovery, surpassing the 9,500 level will be important. This strength does not yet seem to have materialized. While reactionary buying may be seen at support levels, the likelihood of a strong recovery appears weak.