Saturday, 22 September 2018

Not bad, considering

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There is no denying the last 12 months have been a rough ride for the Turkish equity market. Look a little closer, however, and the omens are pretty good: although there has been a downward trend, at least the market has remained orderly, while the continued presence of many foreign investors shows a long term commitment to the country that will stand it in good stead. Solomon Teague reports.

By recent standards, some semblance of stability has recently returned to the Turkish equity markets. After a period of considerable volatility, when prices fell from a high of nearly 55,000 at the start of 2008 to around 21,000 by November that year, values on the ISE100 index are remaining steady within a range between 23,000 and 26,000 with occasional outbursts.

Even when the markets were at their most volatile, the fact that Turkey’s equity market remained open without interruption, in contrast to Russia, for example, illustrates a level of maturity of which the country’s bankers are justifiably proud.

“The market really proved itself in this crisis,” said Ahmet Raif Unuvar, chief executive of Deutsche Securities Menkul Degerler. “In contrast with some other emerging markets, the Turkish market has not been shut down even once in this hectic environment.”

But while Turkey’s reputation as an emerging equity market has probably come through the last 12 months in a relatively strong position relative to its peers due to its ability to offer uninterrupted and orderly trading, it has still seen liquidity evaporate, particularly among foreign investors.

The index was hit disproportionately hard by the declining participation of foreign investors. In Q3 2008, nearly three quarters of the Turkish free float was in foreign hands – although the 25% of domestic investors accounted for three quarters of the trading activity. At the end of Q1 2009, foreign participation had declined to around 63%, removing a significant proportion of the long term investor base from the Turkish market.

“This was a huge success for Turkey,” said Unuvar. Considering the pressure foreign institutions were under to cut their emerging markets exposures, the fact so many have stayed in Turkey is a massive vote of confidence in the market, he said.

Foreigners tended to have their holdings concentrated in bank stocks, which held a higher weighting in the index. When foreign capital flowed out of Turkey, this therefore hit bank sector stocks particularly hard, which in turn saw the index fall by more than the overall equity market, contributing to the volatility for which Turkey is renowned.

In late 2008 the equity markets turned over about US$1.3bn a day – an impressive turnover for an emerging market. This has fallen to around US$500m–$600m a day during the first quarter of 2009, despite the continued presence of domestic investors who always constituted the market’s more frequent traders. Part of this decline is accounted for by the decline in the value of the lira, which has hit the value of the overall market, said Unuvar.

No IPO pipeline

The picture, therefore, remains gloomy, despite the positive signs. Nobody expects there to be any IPOs this year: it would be a sign of desperation to list at the levels currently on offer on the Istanbul Stock Exchange. Weakness in the equity market has also uncovered some legal issues with regards to rights issues: shares must be issued for at least one lira, which has been prohibitive in an environment where many shares have dipped below this level, but this is unlikely to cause a problem in the medium term as it can be easily resolved with a small change to the law.

There has been some limited activity in the rights issuance space – though not much. In February Turkish airports operator TAV conducted a TL121m (US$73.5m) rights issue which saw take-up of 99.9% in a deal that raised money to reduce debt, which stood at 2.2 times equity, according to analyst estimates.

It was an oasis of activity in an otherwise arid equity landscape. Excessive market volatility has dissuaded corporates from any listing or rights issue plans they might have harboured last year, although the market now looks to have stabilised, which might help get it going again.

The situation in the Turkish equity market over the last 12 months is exemplified by Halkbank’s aborted plans in the summer of 2008. The Turkish government was set to conduct a follow-on offer of shares, and planned to sell 24% of the bank, which was first privatised in May in a TL2.5bn IPO of a 25% holding. But the second deal never materialised, much like a number of other deals, and there has barely been so much as a rumour since.

Aril Seren of the Istanbul Stock Exchange confirmed there are no imminent plans for an IPO on ISE, with the only ones that could conceivably come in this environment being privatisations.

Part of the problem for Turkey is regulatory: in one of the world’s more volatile equity markets, deals are often scuppered by rules governing IPOs which demand a very narrow offer price range. Consequently, market moves often go against the offer price, making deals unattractive at the crucial moment.

The ISE is trying to make the IPO process easier and is encouraging corporates to think now about listing plans they might have for the future. Although the listing process at the exchange itself is relatively quick – up to three months from the moment the decision to list is made – the decision by the issuer to list can be much longer.

Seren said that listing could be an attractive proposition again in “a year or two”. He predicted market levels will have reached the same levels they saw in early 2008 by late 2010.

Cynics say that the Turkish equity market threatens to take off once every seven years, but after six months closes again. Seren acknowledges that there some work to do to attract investors back into Turkey, and the exchange is working, alongside a number of local brokerage firms, on a number of new products it hopes will help to do that. Among these are capital guarantee products, ETFs, warrants and single stock futures.

There is particular excitement about the potential for ETFs. There are already nine that offer exposure to the Turkish market, and more are expected within months. Most of them are likely to focus on large caps, for example the ISE30. There are also plans to develop products based on a Federation of Euro-Asian Stock Exchanges index.

They are expected to be particularly popular with investors as the equity market is currently at a relatively low level, limiting downside expectations, according to Seren. Partly for this reason, there is an expectation that index products will prove more successful in the Turkish market than single stocks.

Warrants are also expected to find favour with investors as a useful hedging tool that they can understand – far removed from some of the more complex derivatives that have been launched on Western exchanges in recent years. The various new products currently in development are likely to see whatever growth there is in the Turkish equity markets, predicted Unuvar.

The ISE is using the current economic climate as a time to strengthen its position in the region, in line with the government strategy of making Istanbul the financial hub of the region. It is investing in its buildings and its technology and promoting the city as an international financial centre.

It has an 18% stake in the Turkish Derivatives Exchange, or VOB, based in the Aegean city of Izmir, to which it has provided executives and software, and for which its subsidiary also conducts settlement. The ISE is also looking at the possibility of offering derivatives as part of its own offering, although this is currently in the hands of the regulators.

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