Comparison of the ISE with the Stock Exchanges of Other

Countries

In order to better present the situation and progress of the ISE, it has been considered useful to compare the stock exchanges of some EU member states with the stock exchanges of emerging countries.

a) Comparison of Index Yields with Other Countries' Stock Exchanges The graph below shows stock index yields in US $ segmented according to some member countries of the EU and developing

44 Turkish Capital Market 2005, ibid, p.48.

As can be seen from the graph, the index yields of member countries of the EU, such as Poland, Hungary, Greece, Italy and Spain and of developing countries have been under the index yields of Turkey in 2005. Turkey's yields with 61%

followed by yields of 58% in South Korea, are followed with approximately 45% being achieved by Brazil and Mexico. The stock exchanges of Israel and Poland, Argentina and Hungary have achieved similar yields. In 2005, the striking fact was that Greece had the lowest performance in stock exchange yields in 2005. The stock exchange of Thailand has recorded the lowest yields. Also it is possible

to see that the Malaysian Stock Exchange does not show any marked change. The stock exchanges of Italy and Spain, considered to be developed markets, have experienced losses through insufficient yields.

b) Comparison of Market Value Rates of Companies with Gross Domestic Product

The ratio of the market value of companies whose stock are quoted on the stock exchange in the Gross Domestic Product is an important indicator for the evaluation of the situation of stock exchanges in a country's economy. The graph below shows the rates of these countries as per year 2004 and 2005.

Graphic 5: Comparison of Stock Index Yields with Other Countries.

Source : Turkish Capital Market 2005, Publication of the Association of Capital Market Intermediary Institutions of Turkey, p.34.

Malaysia, with its high rates, immediately draws ones attention.

In comparison to other countries, the rate of Market Value/Gross Domestic Product of this country was quite high in 2005. However, it can be seen that the rate decreased in 2005 in comparison with 2004.

Indeed, the rate of 154% recorded in 2004, had decreased to 136% in 2005. Beside this, Malaysia is the only country whose rate has shown a decrease in 2005 in comparison to 2004 among the countries indicated in the graph. Israel's rates, after Malaysia, show strong performance in comparison to the other countries. In 2005, South Korea was the country with the highest percentage of penetration of the stock exchange in the economy of the country. The reason for this development was the unification of the three hitherto existing stock

exchanges of Korea into a single stock exchange. After South Korea, Turkey has been the country which has recorded an important increase in 2005 in terms of the percentage of Market Value/Gross Domestic Product. This rate, which had recorded 21% in 2004, increased to 46% in 2005. It is useful to consider that Poland, Mexico, Hungary and Argentina all show similar rates.

c) Comparison of Number of Publicly Traded Companies

As is known, companies requesting long-term funds can issue stock by public offerings and may meet their requests form the capital market. An increased number of publicly traded companies is an indicator of the effectiveness of the stock exchange. The graph below shows the number of publicly traded companies per country, as of 2004 and 2005.

Graphic 6 : Comparison of Market Value Rates of Countries With Gross Domestic Product.

Source : Turkish Capital Market 2005, Publication of the Association of Capital Market Intermediary Institutions of Turkey, p.34.

What is striking is the increase in the number of companies publicly offered in South Korea in 2005.

However the reason for this increase has been due to the mergers of stock exchanges in Korea as mentioned before. Upon merger, the total number of publicly traded companies totalled 1.619 in Korea in 2005. When analysed generally, in 2005 there has been no major increase in the number of publicly traded companies in comparison to 2004 in other countries, except for South Korea. The rate of increase achieved was 6% for the stock exchange of Malaysia, 9% in Thailand, 12% in Poland. The

increase rate of Turkey was about 1% - 2% along with Israel. In the Brazilian, Greek, Argentinian and Hungarian stock exchanges, the number of publicly traded companies has fallen.

d) Comparison of Volume of Stock Exchange Transactions and Market Value

The comparison of the volume of stock exchange transaction with the market value shows the turnover rate of stocks of a stock exchange.

High turnover rate, as well as the risk of low liquidity is an indicator for the weighted short-term investments on these stock exchanges.

Graphic 7 : Comparison of Number of Publicly Traded Companies among Countries.

Source : Turkish Capital Market 2005, Publication of the Association of Capital Market Intermediary Institutions of Turkey, p.35.

When analysing the graphic, it is possible to see that the South Korean stock exchange had the highest turnover rate in 2005 and followed by Turkey. In 2004 however, the turnover rate of Turkey was higher than that of South Korea, but the situation changed in 2005. While in 2005, the turnover rate of Korea increased to 168%, the turnover rate of Turkey decreased from 150% to 125%. By comparison, Hungary has increased its turnover rate considerably like South Korea in 2005 and reached 75%. In other countries, small increases and decreases are visible.

When analysing other data of the stock exchange in Turkey, it is clear that the rate of fixed-income security/Gross National Product decreased from 52% to 50% in

2005. Interest rates, which have continued to decrease in 2005, have ensured that domestic debts could be calculated with lower interest rates, thus causing the slow down in the increase rate of domestic debts.

The rate of the portfolio growth of investment funds in domestic national product is an indicator for the progress of the institutional investor base in the country.

Although investment funds in Turkey display a fast increase each year, when compared with other countries, this rate is low. In 2005, the extent of the investment funds has increased from 18 billion Dollars to 23 billion Dollars, while its share in Gross Domestic Product has increased from 6% to 6.3%. When the yields of investment instruments are analysed, it can be seen that in

Graphic 8 : Comparison of volume of stock exchange transactions/market value among countries.

Source : Turkish Capital Market 2005, Turkish Capital Market Publication of the Association of Capital Market Intermediary Institutions, p.36.

comparison to other investment alternatives, the yields obtained from stock exchange instruments have been high. In comparison to other investment instruments, the ISE National -100 has recorded quite high yields, a nominal basis of 59.3%

and a real basis of 47.9% in 2005 ⁴⁵.

8. CONCLUS‹ON

This work has examined the development of the critically important capital market and one of its most important components, the stock exchange, beginning with the Ottoman period continuing through to the proclaimation of the Republic of Turkey. During the period in which the Ottoman Empire considered the establishment of an exchange, the conditions required for such an endeavour- the necessary economic dynamism, investment and production increases, the widening of trade networks, the range of financial intermediaries -were not in existence.

Beyond these issues, there simply was no state strategy directed at the economy or financial sector nor was there a basis for any such perspective.

The most definite reason in the establishment of a stock exchange was to create provision for the circulation of government bonds. Due to a lack of stable foundations, the Galata Exchange had difficulty in providing the anticipated level of benefit to the Ottoman state and economy. However, it is possible to

be overly-harsh in evaluating the exchange of that period when equipped with a modern understanding of finance. Any evaluation should necessarily take account of the conditions under which the Galata Exchange operated- political developments, foreign wars and their financing, the domestic and foreign debts extant and the economic convulsions which the country went through. Suffice to say that the present day Istanbul Stock Exchange has deep historical roots extending back to the Galata Exchange.

The ISE, which has passed through many important stages, is now at a point where it is capable of constantly finding ways to renew itself and embrace change at a time of globalisation. With the appearance of new requirements, new organisations, new institutions and new intermediaries every passing day, the ISE is obliged to seize the initiative.

Furthermore, as a national stock exchange in an EU candidate country, the ISE needs to aim at harmonising itself to the necessary legal reforms and the structural characteristics of international markets.

The ISE not only occupies an important place in the field of developing markets, it has developed into a pole of attraction for global liquidity. In terms of its shares volume, market capitalisation and the number of companies trading on the exchange, the ISE is a significant stock

45 Turkish Capital Market 2005, ibid, p 37,39,40.

exchange in international terms.

However, ongoing economic problems have negatively impacted on the development of a dynamic capital market and stock exchange.

To eliminate the problems existing in the capital market, to ensure its healthy growth and facilitate its integration with international markets, it is possible to suggest the following measures:

• The source of economic instability-increases in the current account deficit together with the size of domestic and foreign debts should be closely monitored. To reduce the scale of these problems, structural precautions should be implemented without delay.

• Provision should be made for the capital market to function in a more effective manner. In order to attain this goal, mechanisms concerned with long-term funds should be established. Greater depth should be provided for shares and stocks markets, the number of institutional investors should be increased, paticipation in the pension fund system should be improved.

• The amount of trading in derivatives markets should be increased. Give that there is a high level of risk and uncertainty in Turkey, the use of derivatives products as a means of avoiding risk should be actively promoted and become more widepread.

• As seen in the recent past, movements in capital markets by short-yerm foreign investors have

caused great turbulence in Turkey.

For this reason, it will be beneficial to control short-term capital market inflows as they enter and exit the country.

The requirement for capital inflows in efforts aimed at the development and industrialisation of the country will assume an increasingly important dimension in the coming years. In meeting this requirement, a developed capital market operating at an international level will become one of the key determinants in achieving economic growth.

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ART‹CLE AND CONFERENCE PAPERS :