In 2010, Turkey’s capital markets celebrated the 25th anniversary of their creation. From the early days back in 1985, when over-the-counter (OTC) trading predominated, through to the age of open-cry floor trading, and now in the realm of a fully electronic trading system, Turkey’s capital markets have seen much in the span of a single generation. Crises have come and gone—and fortunes made and lost—though with each passing year the local capital markets have shaped up into the second largest in Eastern Europe, with only the Russian market outweighing it. The corporate bond market is also beginning to finally take shape, with a number of bank-related issues over 2010 and 2011 reviving a once moribund segment. As Istanbul moves toward its goal of being a regional financial hub, the role that the capital markets play will be key to the government’s lofty ambitions.
The Capital Markets Board (CMB) is the central regulator for all of Turkey’s capital markets, exercising control over the Istanbul Stock Exchange (ISE), the Turkish Derivatives Exchange (TurkDEX), and the Istanbul Gold Exchange (IGE). The CMB’s powers as a regulator are complemented by the activities of the ISE Settlement and Custody Bank (better known by its Turkish name of Takasbank) and the Central Registry Agency (CRA), which acts as the central depository institution for the capital markets.
THE PLACE TO TRADE
The ISE is composed of four main markets, including the stock market, the emerging companies market, the bonds and bills market, and the foreign securities market. The main area of activity is the National Market, composed of 242 actively traded companies as of end-2010, having a combined market capitalization of some $275 billion. A Second National Market composed of 35 companies with a total market capitalization of $4.15 billion as of end-2010 also exists, though is rarely traded. The two main indexes for the National Market are the ISE 100 and the ISE 30, composed of the top 100 and 30 companies by market capitalization, respectively.
An Emerging Companies Market was made operational in October 2010, with the first company listed in January 2011. The easier listing requirements are designed to appeal to smaller companies looking to raise equity, and needing to develop their internal capabilities before possibly transferring over to the main National Market in the future.
The warrants market also received a start in 2010, though trading activity is still small. Another newcomer to the capital markets is that of locally based hedge funds and investment funds, which now have regulatory approval and look set to grow as Turkey’s investor base becomes broader and more sophisticated.
THE YEAR THAT WAS
The ISE 100 index started off 2010 at 52,825 points, and finished the year at 66,004, marginally off the high of 71,543 recorded in November. Over the 12-month period, the index recorded a 24.95% increase, becoming one of the better performers among the MSCI emerging market index. Industrial stocks were the best performers, growing some 38.53% over the year, well outperforming the traditional bellwether of finance and banking, which saw a 24.7% increase over the period, in line with the broader ISE 100 index.
In terms of market capitalization, banking and telecoms stocks dominated, with Akbank (TL34.32 billion), Garanti Bank (TL32.84 billion), İş Bank (TL24.75 billion), Turkcell (TL23.21 billion), and Turk Telekom (TL22.75 billion) making up the top five stocks. In terms of trading volumes, the top five stocks were all financial institutions: Garanti Bank, İş Bank, Vakıf Bank, Yapı Kredi, and Akbank. The volume of trades on the top 25 stocks over 2010 was valued at over TL332 billion for 2010. The average daily trading volume for the ISE as a whole was TL2.54 billion in 2010, with a high of TL4.57 billion and a low of TL1.32 billion.
ISE 100 stocks traded at an average price to earnings (P/E) ratio of 12.2 over 2010 in TRL terms, with financial stocks trading at a P/E of 11.66 over the period, industrials at 16.27, and construction trading at a low 6.6.
In terms of initial public offerings (IPOs), 22 companies joined the ISE over 2010, with another dozen or so slated for listing at the start of 2011. Heightened interest in IPOs has been shown by the Real Estate Investment Trust (REIT) sector, with the 21 listed companies having a combined market capitalization of TL11.6 billion as of end-2010. The largest REIT by market capitalization, Emlak Konuk REIT, only came to the market in 4Q of 2010, though brought with it a hefty TL5.7 billion in market cap to the sector.
THE FOREIGN ANGLE
Foreign investor interest in the ISE remains high, with 66.6% of all stocks owned by foreign institutions at end-2010, up slightly on the 65.6% recorded end-2009, though down on the pre-global financial crisis high of 70.8% recorded at end-2007. Although foreign institutional interest in the Istanbul market was strong over 2010, early figures from 1Q 2011 indicate that foreign holdings of ISE 100 stocks had fallen to 63%, much a reflection of the slowdown seen on the ISE after a strong 2009 and 2010.
Prior to 2010, foreign institutional investors held a tax advantage over local investors, the latter being charged a 10% withholding tax on all profits made from equities transactions. The tax advantage afforded to foreign institutional investors gave rise to a phenomenon called the “mustachioed Turks”, as Turkish investors moved money into overseas trading accounts in an effort to avoid withholding tax, a big impediment for more active traders. In October 2010, the Constitutional Court removed this difference in treatment, and now both local and foreign investors are treated as equal, with both assessed at 0% for the withholding tax. To an extent, the fall in the level of foreign institutional ownership over stocks on the ISE can be partially attributed to this new tax ruling, with the retreat in foreign ownership levels beginning from November 2010 on.
In terms of foreign investor transactions, some TL191.5 billion were recorded over 2010, with financial stocks making up some TL134 billion of the total. The size of foreign institutional ownership of ISE stocks has been seen by some as a primary source of the “hot money” issue that has affected the Turkish markets in the past. However, in an interview with TBY, Hüseyin Erkan, Chairman & CEO of the ISE, denied this, saying that foreign institutional investors only represented about 15% of daily trading volume, meaning the oft-talked about issue of foreign “hot money” was not one affecting the equities market, at least.
TIME FOR BONDS
The moribund corporate bond sector received a shot in the arm in late 2010, with a ruling by the government that bond issuances by Turkish firms would attract a 0% withholding tax for securities with maturities of longer than five years in tenor. The first to step into the picture was Akbank, which launched a $1 billion Eurobond in July 2010. Ozan M. Özkural, Vice-President of CEEMEA Debt Capital Markets at Merrill Lynch International, told TBY that “Turkish banks [are becoming] increasingly keen to term-out their funding base and diversify sources away from the syndicated loan market and short-term deposits.” The issuance of corporate bonds is seen as one way for the banking sector to diversify its funding base. Other financial institutions, such as Yapı Kredi and İş Bank, joined the corporate bond market over 2010, and further issuances are likely over 2011 and beyond.
Turkish-lira denominated bonds also appear to be coming of age. “This year  most large banks have announced that they will issue Turkish lira bonds, as well as some of the smaller sized banks,” as İlhami Koç, General Director of İş Investment, told TBY in an interview. The low inflation and interest rate tracks have been complemented by a more stable economic outlook, making the issuance of corporate lira issues increasingly attractive.
FORWARDS & FUTURES
The Turkish Derivatives Exchange (TurkDEX) is the central trading platform for commodity, foreign currency, interest rate, and equity index contracts. Although its roots lie in the trading of key commodities, such as cotton, gold, and wheat on the Izmir Mercantile Exchange, since its establishment in 2005 TurkDEX has slowly begun to add more instruments primarily aimed at the financial community. Unlike much of the financial industry, TurkDEX is based in Izmir, Turkey’s third largest city, though all trading is done via electronic platforms.
Trading volumes on TurkDEX have shown strong growth since its establishment, increasing from $2.24 billion in 2005 to a more substantial $286.85 billion over 2010. Although TurkDEX is a private company, it is fully regulated by the CMB. In order to encourage the use of a local derivatives exchange as opposed to those more commonly used based in the City of London, foreign and institutional investors receive tax-free status on their transactions. In addition, the ISE-30 futures contract offered by TurkDEX was awarded a “no-action letter” by the Commodity Futures Trading Commission (CFTC) in the US, permitting the offer and sale of such contracts to US investors without any regulatory restrictions.
The range of contracts on offer is slowly growing. Margins and leverage levels remain tighter than those found on many other derivatives platforms, reflecting the desire of the CMB to encourage the responsible use of derivatives trading in Turkey and avoid some of the excesses seen in other markets during the global financial crisis. In terms of futures contracts, TurkDEX offers ISE 30, ISE 100, and ISE 30-100 index spread; T-benchmark government bond interest rate contracts; currency futures and cross rates for the TRY, USD, and EUR; and wheat, cotton, and gold futures and forwards, including physical delivery contracts.
ALL THAT GLITTERS
Another key part of the commodities trading network is supplied by the Istanbul Gold Exchange (IGE), established in 1995. Although gold bullion trading is at the core of the IGE’s activities, to the tune of 115,194 kilograms in 2010 and some $4.4 billion in US dollar/ounce trades alone, it is also responsible for physical trading in both silver and platinum, and is looking to extend its network of trading activities. In April 2011 the IGE started a diamond and precious stones market, looking at generating some $3 billion in trading volumes in diamonds on an annual basis, according the deputy chief of the IGE, Osman Saraç. Other areas of noted expansion include base metals and carbon rights trading. Through its trade in gold contracts, the IGE is also linked into TurkDEX’s electronic trading platform.
© The Business Year