REMAKE REMODEL

Turkey 2014 | FINANCE | REVIEW: CAPITAL MARKETS

Borsa İstanbul, with a market capitalization of $280 billion, has positioned itself as a regional lightning rod for the financial markets, and while in 2013 the renamed exchange took some heavy blows, it nonetheless augmented its international currency.

With a trading value of $243 billion in 2013 among 414 listed companies, Borsa İstanbul ranks 8th amongst the EMs. In the 2012-2013 period Turkey's robust fundamentals led to investment grade ratings from Fitch and Moody's, whereupon foreign investor ownership peaked on March 13, 2013 at 65.87%. Meanwhile, the 76 IPOs seen since 2010 have generated $3.5 billion. The former Istanbul Stock Exchange (ISE) repositioned itself in 2013 under the new moniker of Borsa İstanbul (BİST), as an amalgamation of the former ISE, the Istanbul Gold Exchange, and the Derivatives Exchange of Turkey (TURKDEX). The first trading bell rang on April 5, 2013. Many key developments were to follow over the subsequent months of 2013, where September saw daily trading of equities skyrocket to a record TL7.4 billion.

2013 PERFORMANCE

The benchmark index, the BİST 100, closed 2013 at 67,802 on a bewitched 13.3% YoY decline in TRY terms (17.8% in USD terms). This loss reflected noise regarding the Fed's tightening of asset purchases, and domestically, political volatility ahead of a three-stage election period commencing with the March 30, 2014 local elections. Combined, this left the sour taste of a higher risk premium going into 2014. In fact, the BIST 100 dipped to a YTD low of 61,189 on March 3, but then breached the psychological 70,000 mark to close at 70,857 on April 1 following the incumbent AK Party victory at the local elections, seen as a referendum on PM Erdoğan's government. This still remained far below the dizzy heights of 93,179 scaled on May 22, 2013.

For 2013 foreign investors emerged as net buyers of defensive sectors like food and beverages and telecoms. The victorious sectors of 2013 were aviation (30% YoY absolute return), insurance (24% YoY absolute return), and steel (13.6% YoY absolute return) in TRY terms. Meanwhile, energy (27% YoY absolute loss), REITs (26% YoY absolute loss), and banking sector stocks (25% YoY absolute loss) were the chief losers on the bourse.

RATE OF PASSAGE

On April 11, 2014 Moody's revised Turkey's sovereign rating outlook from “stable" to “negative," but maintained the sovereign rating at Baa3, within investment grade territory. This contrasted with Fitch's earlier decision to hold Turkey's outlook at stable and country rating at BBB- (investment grade). As part of its reasoning, Moody's cited the dampening effect of lower global capital flows on consumption and investment leading to a cyclical slowdown. In the first session after the news, the BİST 100 had lost 0.7%. On this particular front, investors will be monitoring Moody's next reviews scheduled for August 8, and December 5, as well as those of Fitch on October 3, and S&P on May 23, and November 21.

SPREADING THE REACH

In July Borsa İstanbul signed an MoU with NASDAQ OMX, which provided the technological platform for Istanbul's future role as a regional platform for other exchanges. At the time, Sandy Frucher, Vice-Chairman of Nasdaq, observed that, “It will be the largest and most important bourse or exchange between Central Europe and Central Asia."

Borsa İstanbul also has numerous shareholding interests that render it a formidable force, domestically and, as it intended with its rebranding, internationally too. These include a 52.08% stake in the Istanbul Settlement and Custody Bank Inc. (Takasbank), 100% of TURKDEX, as well as a 24.5% stake in the Kyrgyz Stock Exchange, 24.39% in the Montenegro Stock Exchange, 4.76% in the Baku Stock Exchange, and a 5.01% stake in the Sarajevo Stock Exchange. In December of 2013, an MoU was also signed with the Karachi Stock Exchange.

In September of 2013 a Memorandum of Understanding (MoU) was signed with the International Islamic Financial Market (IIFM). A month later the World Bank Global Islamic Finance Development Center was launched at Borsa İstanbul.

QUITE DERIVATIVE

In the late summer of 2013 the trading platforms of TURKDEX and the Borsa İstanbul Derivatives Market (VIOP) merged, as a result of which futures and options contracts are now traded on a single platform at the VIOP. In December of 2013, the VIOP reached a historic high daily trading value of TL3.2 billion in the wake of its merger with the TURKDEX trading platform.

As 2013 closed with the 140th anniversary of securities trading in Istanbul, the bourse looked to the future of Turkish small businesses by rolling out its BİST SME Industrial Index. And taking a leaf from Dow Jones' book, Borsa İstanbul is also due to launch the BİST Sustainability Index. Initially to feature constituents from the BİST 30, this index will assess companies' green credentials as criteria of qualification. As the BİST itself puts it, “The index will display companies' approach to important sustainability issues including global warming, draining of natural resources, health, security and employment, while allowing the independent assessment and in a sense, registration of their operations and decisions regarding these issues."

A FUTURE FOR OPTIONS

In December of 2012 the Futures and Options Market was launched within the then ISE, profoundly expanding the scope of the Turkish capital markets. The market commenced operations on December 21, and today futures and option contracts are traded on 10 equities from the BIST 30 Index, with a total trading volume over 2013 of TL289.6 billion.