Turkish President Recep Tayyip Erdogan dreams of transforming Istanbul into a financial hub that can rival Dubai or Singapore, but first he needs to win over would-be investors like Ali Bahcuvan.
“I’d rather stay away from the stock market these days,” the 41-year-old Internet entrepreneur said. “The cost of trading has increased and that has hurt liquidity. The stocks I want to trade are all illiquid.”
Market participants say interest from small investors is on the wane, thanks to higher fees and as new flotations fail to spark interest.
That is bad news for an exchange that relies on retail investors for much of its liquidity. It also raises questions about the viability of the government’s drive to make Istanbul a global top-10 financial hub.
Years of solid growth have turned Turkey into a major emerging economy, but its equity market has not kept up.
The government has already introduced some regulatory changes to make Istanbul more attractive for foreign capital, including an ambitious plan to build a US$2.6 billion international finance center.
However, investors say more needs to be done, especially given flagging growth and nagging political worries ahead of June parliamentary elections.
“Right now, Turkey is — without much doubt — not one of the favorite emerging markets,” Renaissance Capital LLC Turkish strategist Mike Harris said. “That also enhances the challenge for Istanbul to be perceived as a financial center, because the economy is going through these doldrums.
Ankara needs to encourage more public listings, more equity issuance and more “truly public” companies, analysts say, especially since many listed firms are still controlled by the government or their founding families.
Erdogan has hardly helped investor sentiment, fulminating against high interest rates in comments that have raised concerns about the independence of the central bank.
“Valuations are attractive, but there are uncertainties regarding the management of the economy after the elections,” asset manager Ashmore Portfoy chief executive Didem Gordon said.
This year should have been “spectacularly positive” for Turkey, because of the lower oil prices, Gordon said, but emerging market volatility and domestic politics have weighed on the markets.
At about US$220 billion, Istanbul’s stock market is the world’s 29th largest, well behind some emerging market rivals.
The Johannesburg market is worth more than four times that, even though South Africa’s economy is less than half the size of Turkey’s.
“There is a mismatch between the complexity and size of the Turkish economy and the size of its capital markets,” consultancy Oliver Wyman Group said in a report last year, adding that the equity market could easily double in size.
Trade is concentrated on just a handful of companies, with just 10 stocks accounting for 70 percent of transactions. Many smaller companies are not liquid enough to draw investors.
Retail investors account for 80 percent of the trade on Borsa Istanbul, but their numbers have thinned after the bourse — which plans to list by next year — hiked its fees. Brokerages are also charging more to offset new capital requirements.
“There has been a significant increase in fees that have hit both brokerages and investors,” said Metin Ayisik, the head of Turkey’s brokerage industry group.
Last year, Istanbul’s investor base shrank by 5 percent to about 1 million investors, he said, adding that the bourse needs about five times that to ensure liquidity.
Istanbul is also hobbled by a buy-side industry that is small, even by emerging market standards.
By contrast, South Africa has scores of money managers centered in Cape Town.
Oliver Wyman said Turkey could build up the buy-side industry by encouraging the engines of the economy — small and medium-sized companies — to go public.
There have been some positive signs, such as recent government incentives for retirement savings, which have boosted demand for private pension funds.
However, the government still needs to do more to encourage savings.
“A lot needs to change in terms of creating a strong domestic pool of assets, because then companies come to where the savings are, assuming the regulation is supportive,” Harris said.
“The perception of Turkey can change on a dime if the policymakers aggressively embraced reforms,” he added.
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