The rise of small investors

Sharp rate cuts, high inflation and low interest rates have drawn hundreds of thousands of local investors into Borsa Istanbul, which has become an attractive investment opportunity for small, individual investors.

Borsa Istanbul has been witnessing a quiet shift in its investor base, where individual domestic investors are replacing global investors who have been offloading their portfolios since the beginning of the year. The trade volume of international investors in Borsa Istanbul dropped to 53 percent on May 27, the lowest level since 2005. By comparison, the past decade has seen a stable level of over 70 percent.

Even though daily trade activity has been dominated by algorithmic and machine transactions, sometimes reaching over 70 percent, Borsa Istanbul is increasingly controlled by the new local investor base, two bankers, a local and an international, told Executive TR Monitor. Their share on some days exceeds 50 percent, they added.

INFLUX DRIVEN BY RATE CUTS

The return of small investors began in the last quarter of 2019, after seeing a consecutive drop of trade volumes in the first three quarters of last year. The influx was sparked by Central Bank rate cuts, which gradually dropped to 8.25 percent from 24 percent, both bankers said.

The rapid cuts boosted the interest of local investors in Borsa Istanbul, who prefer promising opportunities in the stock exchange market over bank deposits that offer returns lower than inflation. The number of individual local investors was around 1.15 million in September-October 2019 but rose to over 1.20 million by January 2020. The increase halted during the COVID-19 pandemic, as expected, but the trading volume growth didn’t stall, the local banker said. Even though global stock exchanges weathered high volatility, the number of new investors in Borsa Istanbul recovered during the turmoil,

surpassing 1.4 million in April.

IS LOCAL INTEREST SUSTAINABLE?

The local investors flocked to Borsa Istanbul mainly due to low interest rates and tax exemptions, at a time when forex and gold are at their peaks with high taxes imposed on their transactions, both bankers noted. As long as the low interest rate policy continues alongside tax exemptions for Borsa Istanbul revenues, the local investor interest is here to stay, they added.

HOW DO LOCAL INVESTORS BEHAVE?

The new local investors particularly invest in fast moving small and medium sized company stocks, according to the bankers. They prefer higher yields, which bring higher risks.

Who benefited from the local interest?

State owned banks that have a vast distribution channels, each with over 1,000 branches around the country, mainly benefited from the growth of the local investor base, according to Borsa Istanbul and Istanbul Settlement and Custody Bank (Takasbank) data. The shares of three state banks in Borsa Istanbul’s trade volume - Ziraat, Vakif and Halk - doubled to 10 percent in the first five months of this year, compared to the same period of 2019.

Foreign investors want to see the first quarter results and assess the damage of COVID-19 on public companies, one of the bankers said. Second quarter results will show them the effects on balance sheets while third quarter results will allow them to review if companies are recovering from the crisis, he added. Their return will depend on those results and could happen in the last quarter, the banker noted.