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.

Why Foreign Portfolio Flows Matter

Foreign Investers Holdings in Turkish Equities

In every emerging market, the capital flows from developed countries have the ability to determine the direction which asset prices move into. Particularly, in Turkish stock market where the foreign investors hold roughly 65% of total assets have strong influence on returns. To this extent, the chart above show the net weekly transactions by non-residents in Turkish stock market and the benchmark equity index’ return during the same period. Interestingly, foreign investors have been consistently selling Turkish equities since September 5, and since that time we have seen Borsa Istanbul 100 index has fallen by 9%.

These portfolio flows are even considered as good tools to explain crisis in some cases, and vice versa, crisis most of the time can explain the volatility of portfolio flows.

Foreign Investors’ Behaviors in Turkey

Tracking the foreign investors’ behaviors is the perfect guidance when it comes to investing in Turkish assets. This is also explaining the asset prices hit the top where non residents’ holding of assets makes a boom, in contrary, the market dips where non-residents turn out to be bears.

Non-Residents Holding of Turkish Assets

According to the Central Bank of Turkey data, the amount of cash flows into Turkish markets hit six-month at the end of week ending 25 Sep 2013. We also saw JP Morgan upgrading Turkey to overweight at that week.

Shortly after, Turkey is listed among the most fragile economies of the world as BIITS, supported by the worse than expected inflation data. However, we had another investment analysis report by JP Morgan, advising its customers to buy Turkish equities.

It is hard to get a clear picture of where the market is heading into these days, but in my point of view Turkey is not a blanket buy anymore, even if some non-residents expect a rally.