A stinging blow to Turkish and Argentinian stocks from MSCI

Borsa Istanbul’s BIST 100 Index closed Monday at 115.190 points, the highest close since Feb. 21, gaining as much as 1.39% from the Friday close of 113.612. The index has climbed over 37% from its March 23 low of 84.246.

Turkish stocks are about to set a record for their longest-ever rally. It’s all thanks to locals, because foreigners have turned their backs on the Istanbul equity market in unprecedented fashion.

The very factor drawing more and more locals to the stock market is the main reason foreigners have been heading for the exit: the diminishing appeal of Turkish fixed-income assets. And, although Turkish stocks have recently been gaining in local-currency terms, the lira’s 12% slump against the dollar this year has added to their unattractiveness to outsiders.

“Strongly negative real interest rates deter fixed-income investors,” said Julian Rimmer, a trader at Investec Bank Plc in London. “As a result, internationals have deserted the equity market in droves. For Turks, however, it’s more difficult to find alternative investments to fixed income or deposit accounts and so they are forced into the stock market to try and beat inflation and protect savings.”

On top of that, some foreign investors have doubts about the government’s management of the economy and the central bank’s capability of delivering appropriate monetary policy, Rimmer said.

It is questionable whether domestic can drive the rally further, if economic recovery peters out in late summer, while Covid-19 makes a comeback.  Eventually the BIST, as the Istanbul Stock Exchange is called, will need foreign investor participation for sustainable advances. Yet, according leading index compiler MSCI, Turkey and Argentina face the threat of being demoted.  With passive index funds now ruling the industry  and many active fund managers actually trying to shadow MSCI or FTSE indices, demotion would lessen the chances of further gains in equities.

MSCI to play the spoiler

“While volatility increased dramatically due to the COVID19 pandemic, global equity markets remained accessible and continued to function well, allowing issuers to raise capital and investors to manage risk during the crisis,” said Dimitris Melas, Global Head of Equity Research and Chairman of the MSCI Index Policy Committee. However, Dr. Melas added, “In the last 12 months, two important Emerging Markets, Argentina and Turkey, suffered substantial deterioration in market accessibility that could lead to their exclusion from the MSCI Emerging Markets Index.”

Marked deterioration in investability of the MSCI Turkey Index

MSCI announced that it may launch a consultation on a reclassification proposal for the MSCI Turkey Index to Frontier Markets or Standalone Markets status if the already deteriorating accessibility level of the Turkish equity market were to worsen further. As highlighted in the MSCI 2020 Market Accessibility Review released on June 17, 2020, the accessibility level of the Turkish equity market has been adversely impacted by the introduction of short selling and stock lending bans in October 2019 and February 2020, respectively. These bans severely restrict the ability of institutional investors to express active investment views and hedge portfolio risk.

Potential exclusion of the MSCI Argentina Index from the MSCI Emerging Markets Index

MSCI announced today that it will continue consulting with market participants on the classification of the MSCI Argentina Indexes, as international institutional investors continue to be subject to stringent capital controls which were put in place in September 2019, making it impossible for international investors to access the domestic equity market.

“The MSCI Argentina Indexes remain replicable, as only foreign listings are currently eligible for index inclusion, but the imposition of the current capital controls is not in line with the market accessibility criteria of the MSCI Emerging Markets Indexes,” said Sebastien Lieblich, Global Head of Index Solutions and Chairman of the MSCI Equity Index Committee. Mr. Lieblich added, “The Argentinian authorities must realize that the prolonged application of capital controls or the introduction of further capital controls may force the reclassification of the MSCI Argentina Indexes from Emerging Markets status to either Frontier Markets or Standalone Markets status.”

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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.