Global Business Reports on behalf of bne -

Want proof that Turkey is coming out of the crisis? Then look no further than its capital markets. The Istanbul Stock Exchange (ISE) and Turkish derivatives market, TurkDex, set a series of record highs this year as investors adjust to the new era of low inflation and interest rates.

In July, the ISE 100 Index smashed through its all-time high and passed the psychologically important 60,000 mark even as portfolio investors in many other parts of the world were still licking their wounds. By mid-September, the index was trading around 63,400, which was up 20% from the beginning of the year. And ISE CEO Hüseyin Erkan says that despite the growth, the market is still undervalued compared with its peers in Western Europe. "Price issues in our markets are still below the average of emerging markets and are well below the average of developed markets, which makes Turkish companies attractive to investors," says Erkan.

Representing almost 67% of equity ownership as of September 6, foreign participation in the market is huge. In a sign of confidence, foreign equity ownership did not change that much during the crisis, only decreasing to 63% at its lowest point.

Not much free

Still, the market suffers from the small size of free floats, which is holding back faster growth. The minimum free float required for listing is 25% and with most listed companies still family controlled or foreign run, there is a reluctance to increase this. The result is a lack of dynamism in the market and a limit on developing long-term investment strategies.

"In Turkey, there are no companies that you can take over from the stock market. The stock market in Turkey does not give people control, which is the reason why the average holding length here is 28 days. The link between business and the equity market in Turkey is very weak compared to the USA, where it is very high. The families of the businesses still control 51% and therefore other investors have to invest opportunistically," explains Kare Yatirim CEO Ümit Kumcuoglu.

The ISE's Erkan admits the size of the free floats is a problem, but the situation is improving; the average free float is now 34% in the market, compared with the 23-24% it was 10 years ago. "Average free floats are not up to our expectations, but are still above other emerging markets," he says. "The market and companies should see this as a necessity themselves and make public offerings and increase capital on their own accord."

The lack of local institutional investment is another limit on the development of the stock market. Part of the problem lies with the current regulation of the fast-growing local pension fund industry, which prohibits investment in the stock market.

The lack of instruments available has also acted as a brake on development. As Orion Investment's managing partner, Tanju Günel, observes: "Especially on the domestic side, there is money waiting to be invested, but there aren't enough ways to invest it."

Erkan admits there is a lack of instruments, but says the bourse has a lot of plans in place and has made many applications to the stock market regulator. "We are preparing other contracts, although some are still waiting at the regulatory level. It is a process that will develop through education," he says.

The ISE has been working to broaden and deepen the market, promoting the launch of corporate bonds. "Until recently, the government was the major borrower in the country. There was crowding out in the market, so corporations could not be competitive when it came to corporate bond issues," explains Erkan.

But Orion Investment's Tanju Günel predicts that, "corporate bonds will become a new and important instrument for Turkish investors in the future."

Warrants hope

The biggest innovation on the stock market has been the launch of the warrants market in August. With the first contracts based on the ISE 30 Index, the ISE is aiming to reach 50 or 60 contracts by the end of 2010 and for volumes to slowly increase. Companies are showing a cautious but optimistic view of the new market's potential. "Like some of our competitors, we are waiting for the market to evolve this year to enable us to issue warrants," says UniCredit Turkey CEO Dr. Kaan Basaran.

With around 320 companies currently listed, the ISE is still a comparatively small exchange. From an average of 25 companies listing annually in the 1990s, in the last 10 years the figure has dropped to five or six a year. Just 12% of the country's top 1,000 companies are listed, so the exchange is actively encouraging companies to float. The ISE's Erkan feels the strategy is working: "The speed of public offerings has increased rapidly and until now 14 companies have made public offerings, five bond issues and two ETFs."

Though the offerings have raised close to TRY2bn, most of the companies involved have been small and medium-sized enterprises. Larger companies seem to be holding off until the international markets recover.