(Bloomberg) -- Shares in Turkish banks are headed for their biggest weekly drop in more than a year, as the prospect of high-for-longer interest rates prompted investors to take profit off the sector’s massive rally in favor of non-financial stocks.
The Borsa Istanbul Banks Index has shed more than 11% this week, losing as much as 4.2% on Friday to touch 3-1/2 month low. The main benchmark, Borsa Istanbul 100, slipped about 1%, with a 4.5% weekly loss so far.
Analysts say that while Turkish inflation is steadily slowing, the central bank looks determined to keep interest rates at the current 50% level for longer than previously anticipated, potentially keeping loan demand subdued. Bank shares have also rallied hard since Turkey pivoted back to orthodox monetary policy just over a year ago to tame price growth.
“Investors are rotating away from banks into non-financial stocks,” said Tunc Yildirim, managing director of Unlu Securities in Istanbul. “Broadly, the prospect of tighter monetary policy for a longer period of time, coupled with the expected economic slowdown are all headwinds for equities,” he said.
Read: Turkish Inflation Set for Huge Drop That Central Bank May Ignore
Investors had piled into the shares in Turkish lenders on a bet they would benefit from policy normalization this year, leading to the biggest outperformance against the broader index since 2020. But after an 85% gain for bank shares between end-2023 and mid-July, the rally lost steam as rate-setters pledged to steer clear of speedy rate cuts.
Year-to-date gains now stand at 48% for 2024.
On Thursday, central bank governor Fatih Karahan said during a quarterly inflation report presentation, that he wanted to see a “marked and lasting deceleration in main inflation dynamics” signaling he will stick to tight policy for now.
The prospect has weighed on the broader market too, with foreign investors selling net $2.2 billion in Turkish equities since May 10 through August 2, according to data from the central bank. The main Istanbul index has shed nearly 10% since mid-July, with year-to-date gains now at 33%.
“Domestic funds have mostly replaced foreign funds in the past three months as foreign investors cashed in their gains. So if the decline in equity performances continue, then we may see outflows from domestic funds and accelerating losses in equities, which may set the path for a possible correction,” Yildirim said.
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