Company / Analytics

Analytics, 02 June 2023

Turkish Lira vs. Stock Market: Divergence Analysis

On Monday, the Turkish lira hit an all-time low after President Erdogan was confirmed as the victor in the 2023 presidential election (Last Sunday), pushing his time in power into its third decade. Counterintuitively though, the Turkey ISE National 100, Istanbul’s primary index, saw an approximate increase of 4.31%.

In this article, we analyse why there seems to be divergence between the Turkish Lira and Turkey’s stock market performance.

Why is the Lira reaching all-time lows?

The Turkish Lira has plunged quite drastically, as the currency momentarily fell to 20.0608 against the dollar around 11 a.m. local time on Monday, outdoing the previous week’s record low.

Erdogan supports the non-traditional idea that increasing interest rates fuels inflation. Thus, rather than managing inflation, Turkish monetary policy prioritises growth and export competitiveness. As a result, the lira is under considerable strain due to limited foreign exchange reserves and significantly negative real interest rates.

In addition, Erdogan hindering some of the primary objectives of the West, is another factor that led to the depreciation of the Lira. These primary objectives include robust retaliation against Russia for its role in the Ukraine war and the admission of Sweden into the NATO alliance. His cordial relations with Putin, his resistance against imposing sanctions on Russia, and the procurement of Russian weapons systems by his government have raised concerns among Western officials.

Then, why is the Turkish stock exchange making gains?

Despite the Lira’s sharp depreciation, Istanbul’s main index, the Turkey ISE National 100, rose by approximately 4.31%. It might seem paradoxical that the Turkish stock market is experiencing a boost, even while the lira hits record lows. However, if we delve into the intricacies of the market dynamics and the monetary policies being pursued in the country, the picture begins to clarify:

For starters, Erdogan’s unorthodox monetary stance—asserting that high interest rates fuel inflation rather than subduing it—has led to a prioritisation of growth and export competitiveness over inflation control. This strategy may have an immediate effect of making Turkish goods more affordable on the international market due to the weaker lira, potentially boosting the revenues of Turkish exporters. This prospect can enhance the appeal of these companies on the stock market, thereby driving up their share prices and ultimately the indices they feature on, such as the ISE National 100.

Meanwhile, the pronounced decline in the value of the lira can trigger a ‘flight to safety’ among local investors. When faced with a devaluing currency, investors often look to protect their assets by allocating them to equities or other investments that are expected to hold their value or even appreciate. This increased demand can, in turn, drive up stock prices and indices.

Moreover, many Turkish companies listed on the ISE 100 index have substantial international operations. As the Lira weakens, these companies’ earnings in foreign currencies become more valuable when converted back into Lira, improving their financial performance and hence, their stock prices.

However, the sustainability of this stock market rally amidst the tumbling lira is debatable. While export-oriented sectors may enjoy short-term benefits, the broader economy could suffer from rising import costs and inflation, hampering consumer spending and possibly straining corporate profits overall. It is also worth noting that foreign investors may be wary of entering or expanding their positions in such a volatile environment, potentially putting a damper on the market’s performance in the future.

Investors Note

In sum, the divergence between the Turkish Lira and stock market performance is driven by a combination of political certainty, international earnings of Turkish companies, and a potential flight to safety by local investors. However, the current monetary policy environment, characterised by low interest rates and inflation neglect, casts a shadow over the future stability of Turkey’s economy. As such, this unique economic scenario requires careful monitoring and analysis going forward.

It is crucial to remember that the same dynamics that are propping up the market in the short term could sow the seeds of instability in the long term.

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