(Bloomberg) --

Turkish stocks have quickly gone from being the world’s best performers to the worst, with the nation’s equity benchmark showing its weakest start to a year since the global financial crisis. 

The benchmark Borsa Istanbul 100 Index was down 9.7% for the month at the close in Istanbul Tuesday, marking its worst January since 2008 and biggest monthly decline since the onset of the Covid-19 pandemic. 

Political uncertainty has been a key driver of profit taking following last year’s nearly 200% gain for the index, as presidential and parliamentary elections loom this year. President Recep Tayyip Erdogan faces a tight race that could threaten his 20-year rule, the longest in Turkey’s history. 

The election, which was originally scheduled for June 18 but will likely be moved forward as hinted by Erdogan, is a pivotal moment for markets and foreign investors amid concerns over years of unconventional monetary policies. That’s as Turkey grapples with its worst cost of living crisis in decades amid rampant inflation, which surged to as high as 85% in 2022 before slowing toward the end of the year.  

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“Political uncertainties ahead of this year’s election — including regarding the date of the vote — and a rise in deposit rates have led to increased demand from investors to cash in last year’s gains,” said ICBC Turkey Investment’s Burak Isyar. 

Deposit rates have edged higher recently as banks step up efforts to attract more lira savings to meet regulatory requirements. The weighted average rate for lira deposits with up to three-month maturity was 24.6% during the week of Jan. 20, the highest since October 2018, according to the latest official data. This has likely helped divert some funds from equity markets, with deposit accounts still one of the most-favored investment tools preferred by domestic investors.

While Turkish stocks remain a useful hedge against scorching inflation for local investors, last year’s gains are seen to provide a buffer to take profit when sentiment turns. 

“With high levels of leveraged positions, even relatively smaller declines lead to increased calls on margins, and magnify the losses, making it hard to convince locals in a longer-lasting recovery. All that eventually also feeds into even more volatility as a result,” Isyar said. 

(Updates numbers at trading close.)

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