Nov. 25 (Reuters) – The lira’s fall sent Turkey’s exporter-dominated stock market to its best month in 12 years, but for foreign investors, who have just started over, it’s a whole different story.

The stock rally, which brings together exporters such as steel producer Iskenderun Demir (Isdemir) (ISDMR.IS) and glassmaker Sısecam (SISE.IS), saw Istanbul’s main stock exchange at $ 37 billion (. XU100) to climb nearly 20% in November, which is almost as much as the lira collapsed.

Stock markets in emerging economies often rise when their country is struggling, as locals view stocks as a relatively safe asset, as companies raise prices to offset soaring inflation or benefit from a national currency. lower if they export abroad.

Large international investors are however in the opposite situation. They usually have to convert whatever they hold into dollars or some other major currency, which means they see a huge drop in value.

The MSCI dollar-denominated index of Turkish stocks (.dMITR00000PUS), for example, fell 9% during Tuesday’s brutal pound rout, when it was down 20% this month and 30% since the beginning of the year.

Falling currencies – triggered by an unorthodox policy promoted by President Tayyip Erdogan of cutting interest rates, hoping to boost the economy and jobs, while inflation hovers around 20% – at least left Turkish stocks historically cheap and for some investors a useful hedge against losses elsewhere.

“The main reason for the historic highs in sterling is the sharp depreciation (of the lira) (…) and (…) the spectacular stock returns of exporting companies,” said Doruk Ozaner, fund manager at Istanbul Portfoy .

“When we look at the dollar stock market (it) is historically very cheap,” Ozaner added.

Refinitv IBES data shows that the dollar-denominated price-to-earnings (PE) ratio of the MSCI Turkey Index now stands at 5.4, well below its equivalent for emerging market peers at nearly 13.

PROFIT BONDS

Many Turkish exporters are benefiting from the fall in the pound and the rebound in the global economy this year after the initial shock of COVID-19. Isdemir said third-quarter net profit jumped 657% from the previous year to 3 billion lira ($ 242.09 million), while Sisecam’s third-quarter profit of 1.35 billion lire exceeded expectations by 6.5%.

It did not go unnoticed. Foreign investors bought $ 384 million in Turkish stocks in the seven days ending Nov. 19, after registering their biggest weekly inflow in a year with $ 480 million as of Nov. 12, according to data from the central bank. Total net transactions by foreign investors stood at $ 1.14 billion in the first three weeks of the month.

“As foreign investors get cheap books from the swap market, they borrow and take positions in the market. I think the central bank will not hike rates and continue to cut rates. This is the new Turkish economic model; high inflation, high levels (dollar / lira), low interest rates, ”Ozaner said.

The damage caused by more than a decade of weakness in the pound – Turkey’s currency has plunged almost 90% since 2011 – is clearly evident, however.

Data from the Bank for International Settlements shows that nearly 20% of Turkish business income was used just to pay interest at the end of March. In 2011, it was only 7.4%.

For dollar-based international investors, the MSCI Turkey Index is also exactly where it was after the major pound crisis in 2018, when concerns about over-indebtedness and poor relations with the then-US government led by Donald Trump have hit hard.

MSCI’s main global stock index (.MIWD00000PUS), which includes 50 countries, is up 50% over the same period.

SEB emerging markets strategist Per Hammarlund therefore believes caution is still in order, especially if the currency crisis worsens, triggering emergency rate hikes or even capital controls that would prevent investors from exiting. their money.

“At this point, the stock market would look overvalued even though it looks cheap now,” Hammarlund said. “This economic experiment is doomed to failure, I think.”

Reporting by Berna Suleymanoglu, Canan Sevgili and Halilcan Soran; Additional reporting by Marc Jones in London; Editing by Jonathan Spicer and Susan Fenton

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