Diversifying Borsa Istanbul: Analysis

Soner Kistak

Capital markets have numerous benefits for different participants in the economy. For a company or entity in need of funding, domestic capital markets provide an alternative funding source from bank financing. While for investors and savers, capital markets can offer more attractive investing opportunities than bank deposits—depending on risk profile, liquidity needs, and other factors. Having a broad and diversified stock market can increase the efficiency of the whole economy by strengthening the link between the owners of capital (regardless of their size) and those in need of capital (corporation).

Since Borsa Istanbul’s start in 1986, Turkey’s stock market has shown a dynamic evolution. However, an international study of Aggregate Market Cap/GDP ratio numbers (a measure of relative development of stock market) shows that more work needs to be done to make it both more accessible to the public and more integrated with the overall economy. For example, at the end of 2017, the total market cap/GDP ratio for Turkey stood at 26%, while it stood at 70%, 103%, and 159% for Germany, France, and the U.S. respectively.

Obviously, one solution to increase the number of stock market investors is to promote its long-term benefits in the broader public. This requires intensive educational and regulatory work on the part of economic policy makers. Additionally, encouraging more medium sized industrial, healthcare, and technological companies to get listed in the stock market backed by a solid regulatory framework would also help in generating further public interest. If retail investors can directly reap the benefits of investing in the country’s companies, this is likely to create a long-term virtuous circle for the economy.

Another interesting observation concerning Turkey’s stock market is related to its sector composition. Looking at the sector weightings of a country’s main stock market over time provides an indication of the level of sector financialization though it might not fully reflect the real economy. In the Turkish case, we see that between 2005 and 2015, the market index has been dominated by the banking sector. For instance, the weighting of the banking sector was 40.75% in 2015. At the same time, key sectors such as Technology and Energy had very low weightings of 0.20% and 4.41% during the same time interval.  This pattern remained more or less consistent up until the beginning of 2018. However, by the end of September 2018, the relative weight of the Financials fell sharply due to negative developments around the Turkish banks.

In short, having a well-diversified sector composition is not only advantageous for the price resilience of the overall stock market, but it is also beneficial for availing capital for companies operating across a broad spectrum of sectors. Capital availability creates a conducive context for the development and nurture of young companies. For example, it is one of the key driving forces behind the success of U.S. start-ups.

Borsa Istanbul has a lot of development potential; however, some policy reforms are needed to take it to the next level.  For instance, in terms of long-term measures, Turkish public policy makers could make a difference by encouraging more stock market listings and promoting more sector diversification in the country’s capital markets.