Turkey's market has grown by 23% since the beginning of the year. What do investors need to know about it?

Since the beginning of the year, the key index of the Istanbul Stock Exchange BIST 100, reflecting the dynamics of shares of the hundred largest capitalization companies traded on this site, rose by more than 23%, the growth for the year amounted to 40%. Bloomberg wrote that by January 29 in dollar terms it had already set a growth record since 1997. Evgeny Shatov, partner of Capital Lab investment company, tells us what the reason for such a surge is and what risks an investor should be aware of.

Foreign investors brought $1.85 billion to the Turkish market in December-January. Among them was the BlackRock fund: at the end of January it became known that Turkey now accounts for almost 10% of its assets. A year ago, the world's largest investment fund had the Canadian mining company Eldorado Gold Corp. with operations in Turkey as its main investment somehow related to this country.

What is happening is all the more surprising if we take into account that last year there was a massive outflow of investors here after the country's president Recep Tayyip Erdogan disposed of his main opponent. In March 2025, Istanbul Mayor Ekrem Imamoglu was detained, and with him a hundred other politicians and businessmen, which collapsed Turkish indices and the lira.

The country's market has remained out of the spotlight for foreign investors, even as they redirected their capital to emerging markets in an attempt to find an alternative to the U.S. and the dollar. But now Turkish stocks are catching up.

What are the reasons for the market growth? Three factors coincided at once: cheap fundamental valuations, macroeconomic stabilization and a partial cautious return of demand from foreigners.

First, there was a reassessment of inflation and rate expectations. By the end of 2025, Turkey's annual inflation rate continued to decline - it was 30.89% in December and 30.65% in January. And although in monthly terms January inflation beat the market consensus (4.84% vs. 4.2%), investors started laying down a scenario of further disinflation in 2026.

The Central Bank of Turkey, in turn, moved to easing monetary policy, lowering the rate in January 2026 from 38 to 37% (back in January 2025 it was 45%). In parallel, the regulator in its materials fixed the course for further continuation of the policy aimed at reducing inflation. Given that the expectation of rate cuts almost always increases "fair" multiples and especially supports banks and domestic demand, the stock market showed a decent growth.

Second, even after the rally, Turkish securities are cheaper than many emerging market stocks on multiples. They retain a discount in P/E ratio - share price to earnings per share - to their emerging market peers. For example, the iShares MSCI Turkey ETF's P/E multiple over the past 12 months is about 15.46, while the iShares MSCI Emerging Markets ETF's is 16.01. But that discount is narrowing.

Thirdly, the factor of return of money and trading volumes to the market has worked. Foreign demand has indeed become more noticeable: reviews show a positive balance of purchases by non-residents in 2025. Plus, the trading turnover increased in January: in December, the average daily transaction volume on the Istanbul Stock Exchange amounted to 172.22 billion Turkish Liras, and in January it reached 195.1 billion Turkish Liras. This confirms that the rally was fueled by a significant amount of liquidity.

The outlook for 2026 looks slightly better than before, and the Turkish market still has several obvious growth drivers. It has historically been significantly dependent on the macroeconomic environment, so the most likely outlook for this year is that growth will only continue if investor confidence in the Turkish Central Bank's policies continues.

The baseline positive scenario for Turkey is a "soft landing", i.e. lower inflation with continued gradual rate cuts. In this case, we will be able to observe growth of key market multiples due to falling rates and increasing corporate earnings in lira.

The Turkish stock market is exposed to at least four key risks. First of all, the currency. Even if the index rises in lira, for a foreign investor the bottom line often decides the exchange rate. With another round of pressure on the lira, dollar returns could deteriorate sharply.

In addition, significant for investors is the risk of inflation reigniting. In Turkey, the disinflation trend has traditionally been reversed quickly - through the exchange rate, wage and credit growth, and fiscal stimulus. Any hint of a return to the "cheap money at any cost" policy - and the market will again demand a risk premium.

And, finally, geopolitical and regulatory risks. The market is sensitive to external conflicts, sanctions risks, as well as to sudden regulatory decisions (changes in taxes, rules for banks, introduction of restrictions on operations, etc.).

The most practical way is through exchange-traded funds registered in Europe and subject to EU regulatory rules (so-called UCITS ETFs). For example, through iShares MSCI Turkey UCITS(ITKY). This option involves opening an account with a European broker. The advantages of this method are wide diversification and high liquidity, while the disadvantages are currency and general market risk.

Plus there is also the iShares MSCI Turkey ETF (TUR) U.S. iShares MSCI Turkey ETF. The second option involves opening an account with a bank or broker with access to the US market, if compliance allows. In Turkey itself, foreign portfolio investors are declared to have no formal restrictions on access to the market, but in practice everything depends on bank compliance, documents, origin of funds and transaction chains.

The third investment option is to spot select the best Turkish companies. Which companies make sense to look at?

- Among the banks are Garanti BBVA, Akbank, Türkiye İş Bankası and Yapı Kredi.

- In retail, these are the papers of discounter BİM, one of the country's most traded retailers, Migros and Şok Marketler, a mass market discounter.

- In the telecom sector, Turkcell and Türk Telekom.

- Industries include Ford Otosan and Tofaş car companies, Tüpraş oil refinery, Arçelik home appliance manufacturer, Şişecam, one of the world's largest glass companies, and Erdemir steel company.

- In the defense industry, Aselsan, whose shares are up more than 260% for the year, and Otokar.

However, this is a path for those who are willing to put up with high volatility and understand reporting and regulation. For most private investors, however, the best way to increase exposure to Turkey is to add a Turkish index to the portfolio.

Here are some more tips for investors who are considering investing in the Turkish market:

- It would be more reasonable to "enter in installments" - buy a position not in one order, but in several installments at different moments and at different prices to reduce the risk of entering at the price peak and to smooth out the average entry price;

- Decide in advance how to manage currency risk - for example, partially locking in profits as needed, setting limits on portfolio share;

- clearly define the investment horizon, it is better if it is at least 3-5 years.

Does not constitute an investment recommendation.

This article was AI-translated and verified by a human editor