Turkey: Brokerage Industry Trends

Turkey’s brokerages faced sharp trading falls in a tough climate last year of which 30% reported losses during the first half. That said, we had seen some downsizing-related layoffs as well as some international investment banks simply quitting the business. While this was partly due to some earnings recession felt in the industry, the underlying reason was that it was overcrowded so that more analysts rate Turkey’s bank than cover Wall-Street based banks.

After having a bad year, Turkey’s brokerage firms appear to showing early signs of a turnaround as ROE sector-wide hit double-digit figures again, also taking the 12-month trailing ROE above 10%. As of Q1 the industry returned 11.5% on total equity (excluding FX companies).

Below is the evolution of the profitability metric across the industry.

Turkey - Brokerage Industry Trends 1

Turkey - Brokerage Industry Trends 2

Despite the bottom-line improvement, there still seems to be issues related to the trading volume which would weigh on revenues. However, derivatives including FX, index futures and newly introduced warrants continue to help.


See the following report released by Turkey Capital Markets Association for the industry explained in broad strokes.

Turkish Capital Markets: At A Glance

Profound Shift In Liquidity Risk

On Sep 15 an article appeared on Bloomberg that drew a gloomy picture for the brokerage services industry in Turkey. Some important highlights from the article are as follow:

  • About one third of brokerages posted losses in the first quarter.
  • Austria-based Erste and Kuwait-based Burgan are eliminating jobs while Moscow’s Renaissance Capital is planning to shut its Istanbul office.
  • Thirty-three analysts rate Halkbank (BIST:HALKB), one more than those who rate Goldman Sachs.
  • The Borsa Istanbul 100 Index has fallen 15 percent this year with the number of shares exchanged sinking gradually.

Istanbul stock market has witnessed falling volume year to date as banking stocks that lead the market have dipped further and are now currently traded with historically low multiples. The market risk is to remain high as long as liquidity continues to dry up but at least it is not a problem that market is overlooking anymore.

Turkey - Daily Stock Market Volume

The same goes for bonds market. Many initiatives in Turkey over the past decade have sought to encourage foreign investors to participate in domestic bond market so boost liquidity in local currency instruments. The tax reform and the implementation of a price stability-oriented monetary policy have been instrumental in this regard. However, due to the globally lower risk appetite, uncertainties around the economy and most importantly the failure in the fight against inflation led the foreign participation in Turkish bond market drop to 22% with liquidity evaporating.

Lower volume causing high volatility is one of the key themes in the debt market and is evidenced by the data which is visualized below.

Turkey - Bond Market Yield Changes, Foreign Investors and Liquidity

The reverse relationship between the changes in the total amount of Treasury securities by foreign investors and the yields has been strong in Turkish bond market. However, with the lower foreign participation yields have seemed to fluctuate more strongly even if the capital outflows have been relatively small. All aside there have been some trading days with no transaction made in the benchmark bonds. Now bonds swoon definitely points to heightened liquidity risks.

Unfortunately, it is going to be challenging for investors going forward. What the recent developments in both equity and bond market highlight I just how small changes in supply and demand can make price swings more severe. Thus any move is much more painful to the downside.

Do Turkish Dividend Stocks Outperform in Bear Markets

It is not a secret that dividend-paying stocks often come out ahead during a market sell-off. Because many investors are attracted to the safety appeal of them. As Turkish stock market is hanging around record high levels with foreign capital outflows on the horizon due to expected rate hikes by the US Federal Reserve, it is much closer to enter a bear market this year. Under these conditions one may think that high-yielding Turkish stocks will be seen as a defensive play in bear market in order to protect the value of portfolio, or to surrender a more tolerable loss at least.

This is where we are getting straight to the point. First of all, we determined three bear market periods that averagely last seven months. During these periods Turkish equities benchmark index (known as BIST 100) declined 47.6%, 31.2%, and 41.5%, respectively (see the chart below). Then out of blue-chip Turkish stocks we pick the five highest dividend-yielding stocks for the period of one year to each bear market periods. Ultimately, we compare the returns of the benchmark index and our  picks to see how we would have done in the bear markets with the five dividend stocks using a buy-and-hold approach.

Turkish Stock Market - Bear Market

Our stock picks based on the hold-and-buy the highest dividend-yielding Turkish stocks strategy totally include 11 different stocks and are in accordance with the list which follows: FROTO (Ford Otosan), AKCNS (Akcansa Cimento), CIMSA (Cimsa Cimento), PNSUT (Pinar Sut Mamulleri) BOLUC (Bolu Cimento), TTKOM (Turk Telekom), TUPRS (Tupras Turkiye Petrol Rafinerileri), TTRAK (Turk Traktor), AYGAZ (Aygaz), DOAS (Dogus Otomotiv), NTHOL (Net Holding). In a sectoral breakdown the dominance of industrials and utilities are strikingly clear.

Below shows how our play would result.

Turkish Dividend Paying Stocks Performance

In two of three bear markets, our strategy seems to be beating the market by generating comparatively lower losses. However, in 2008 it generated a negative alpha of 12.1% amid the global financial turmoil. Also in 2011’s bear market the success of the strategy is mostly due to stocks correlating weakly with the overall market return. In additionally the strategy seems to be at its best with an excess return of 20% roughly. Eventually in 2013’s bear market following the Gezi protests and the US Federal Reserve’s first rate hike signal, and continuing with 17 December graft scandal, our stock picks drop by 27.7% averagely while the BIST 100 is down 41.5%.

In conclusion we can say that Turkish dividend stocks may save you in a bear market after reviewing the evidence. Picking safe dividend stocks in a mature bull market where a whiff of change is not that far seems like a considerable strategy to run as well as a further research is absolutely necessary to decide correctly.