Turkish Equities: A Contrarian Play Amid Tax-Driven Capital Shifts

The Turkish government's recent withholding tax hikes on lira deposits, intended to curb budget deficits, have inadvertently fueled a historic capital reallocation: investors are fleeing lira savings and flooding into equities. While this shift has temporarily inflated valuations, it masks a compelling contrarian opportunity. Here's why the Istanbul Stock Exchange (BIST) could now offer asymmetric upside for investors willing to navigate lira volatility—and how to position for it.

The Tax Hike's Unintended Consequence: Equity Inflation

Starting in February 2025, Turkey raised withholding taxes on lira deposits, with short-term (≤6 months) rates jumping to 17.5% and one-year deposits taxed at 15%. Combined with inflation near 38%, these policies slashed real returns on lira deposits to deeply negative levels. The result? A USD 17 billion lira-denominated deposit outflow since 2023 (KKM accounts), while equities surged. The BIST 100 index has risen 15% in USD terms since late 2024, even as the lira depreciated 12% against the dollar.

The tax-driven capital shift has created a short-term overreaction: retail investors, desperate for yield, are piling into equities without sufficient due diligence. This frenzy risks a correction as geopolitical tensions (e.g., the arrest of Istanbul's mayor) and persistent inflation pressure the lira. Yet beneath the volatility, sector-specific undervaluations are emerging.

Sectors to Target: Banking and Real Estate

1. Banking:
Turkish banks, long maligned for exposure to lira weakness, may paradoxically benefit from the tax-driven liquidity shift. With households fleeing deposits, banks are incentivized to lend more aggressively to corporate borrowers—a trend accelerated by the central bank's July 2025 relaxation of credit growth caps.

Key picks:
- Isbank (ISE.ISB): A mid-sized lender with a strong retail footprint and exposure to small-business loans.
- GarantiBank (ISE.GARAN): A leader in digital banking, benefiting from rising digital transaction volumes.

2. Real Estate:
The real estate sector is undervalued relative to pre-2023 fundamentals. While lira depreciation has eroded foreign investor appetite, domestic demand remains resilient. The tax hikes have made real estate investment funds (excluding short-term lira products) relatively tax-efficient, attracting capital from fleeing depositors.

Key picks:
- Yapımerkez (ISE.YAPMR): Turkey's largest mall operator, benefiting from consumer spending shifts to domestic brands.
- TAV Holding (ISE.TAVHL): Airport operator with long-term contracts in USD, offering lira-hedged cash flows.

The Risks: Lira Volatility and Political Uncertainty

The contrarian thesis hinges on navigating two existential risks:
1. Lira Depreciation: A weakening lira could trigger further capital flight, pressuring equity valuations.
2. Policy Whiplash: Turkey's ad-hoc tax changes and central bank interventions (e.g., abrupt rate hikes) create unpredictability.

Mitigation Strategy:
- Hedge with USD forwards: Use FX derivatives to offset lira exposure.
- Focus on USD-denominated debt issuers: Companies like Koç Holding (ISE.KCHOL), which derive revenue from dollar-linked exports, offer natural hedging.
- Avoid short-term lira bonds: Their yields are too compressed to justify the risk.

Investment Thesis: Buy the Dip, Hedge the Lira

The Turkish equity market is pricing in the worst-case scenario—yet the structural shift toward equities is real. The BIST 100 trades at a 10-year low P/E of 9.2x, despite GDP growth projections of 2.5% in 2025. This disconnect suggests a multi-year buying opportunity, especially in banks and real estate.

Actionable Steps:
1. Allocate 5–10% of a global portfolio to Turkish equities via ETFs like XTRK (Turkish equity index fund).
2. Use dollar-cost averaging to enter positions during lira volatility spikes (e.g., around election cycles or geopolitical events).
3. Pair equity exposure with USD/TRY forwards to limit currency losses.

Conclusion

Turkey's tax-driven capital shift has created a classic contrarian moment: fear of lira weakness is pushing investors into equities, inflating valuations in the short term but setting the stage for a long-term recovery. While risks are real, selective exposure to banks and real estate—paired with hedging—could deliver asymmetric returns as Turkey's fundamentals stabilize. For the patient investor, this is a market to buy when others are fearful, but with discipline and protection.