In a period of global economic recession, Turkey has been the fastest growing economy in Europe, for two out of the last three years, and is even projected to post a respectable GDP (Gross Domestic Product) growth figure of 4% for 2013. What impact would you say this economic prosperity has had on you at Finansinvest?
To be honest, we have not seen much yet. If you look at the fundamentals over the past ten years, or since the financial crisis of 2001, Turkey has come a long way in terms of reforms and financial infrastructure. In terms of the economy, inflation was 60%, and now it is down to 6% to 7%. So there have been a lot of fundamental changes. It is not just about economic growth but also in terms of fundamentals – Turkey is in much better shape.
I believe we should be looking forward rather than looking back. When you look back, the capital markets did not show the size of economic expansion or growth in the Turkish market. But hopefully in the next ten years, it is going to be a completely different picture.
According to our analysis, as a company, we always prefer to look at international standards and international know-how. We really value know-how and data. That is why we try to be more innovative within the Turkish market. In order to do this, we look at other developing markets. We are trying to learn from them. Our analysis indicates that in countries where capital markets and financial markets or investments in general grow substantially, this is as a result of two major factors. The first is the interest rate – it is about the real rate of interest versus the real rate of economic growth.
If the economy is growing faster than the real interest rate, then this automatically means that equity investments or investments in other non-fixed income products become more substantial. Over the past two or three years, we have achieved this. I believe that the picture over the next ten years will be much more different, and this will support our business in general.
The second point is obviously the policy makers’ attitude towards the capital markets or financial markets. We have seen significant improvements over the past couple of years. Firstly, the capital markets law is very critical and important. As you may know, the Turkish pensions system is now undergoing a big change. Since the beginning of the year, the government has contributed to up to 25% of your contributions, so it is a lot, especially when you pay around £4,000 a year – you get a 25% contribution from the government, which is significant. I believe the pensions business is going to grow rapidly over the next ten years. This will also fuel the growth of the financial markets and the depth of these in Turkey.
These are the two major factors, but also in terms of demographics, some people say that Turkey has excellent demographics with a very young population. This is excellent in many aspects, but from our perspective, that is not good. When I was 29, I was not saving. I was buying a car, spending or travelling. People tend to start saving when they get married and have kids, when they reach 30 to 35 years of age. I hope that in the next three to five years’ time, the average age of 29 will become 30 to 35 years, so we will have a bigger savings community. This will also fuel the growth in our business.
The problem that Turkey is facing at the moment is the current account and sustainable economic growth. That is why the policy makers and the Vice Prime Minister is focusing on that as well. We have to increase savings as a country and a nation. The current level of savings is not high enough to support the economy in terms of growth; you either need foreign capital or you face current account deficit issues. So in order to get rid of the low savings problem, the financial markets or the Turkish economy should grow and deepen and this should come not just from foreign investors, but also from the higher savings of Turkish retail investors.
The next ten years are going to be a lot different from the previous ten years. Whatever we have seen, the Turkish banking industry has come a long way over the past ten years, and hopefully in 2023 when we look back, we will see that Turkish asset management and financial services industries will have evolved in a very positive way. I am optimistic.
When we met with Dr Ertaş from the Capital Markets Board, he stressed the importance of trust and confidence in the economy for the growth of the capital markets. Do you think that investor confidence has been damaged by the recent events, and if so, what needs to be done to regain the trust of the international community?
To be honest, I look at the protests from a different perspective. The Turkish economy is a lot different compared to what it was ten to twenty years ago. I believe the old reforms in the past helped us. I have been in this market since 1991. At the same time, we are facing a global emerging market sell-off together; it was not just Turkey – all other markets have been hit as well. There is a huge jump in interest rates in all emerging markets, which we view as a mini-crisis. But the current level of interest is around 9% – this is the worst it has got to. In the past there was huge volatility, significant losses and people discussing who was going bust, but that is not the case anymore.
Also, there is another psychological issue. We grew a certain generation with the financial crises, political instability etc. But when you look at the current employee profile of Finansinvest, we have a young team. Most of them did not see the old coalition days and a big boom market followed by a huge crash. I think it will also help with market stability, and the level of volatility will be much less than what we were used to seeing.
So I do not see it as a major investor confidence problem. It was local tension merging with global emerging markets sell-off in general, especially on the equity side. But it could have been much worse. I believe that investor confidence remains intact and it will continue to be very strong or positive towards the Turkish market, not just because of the things that are being done today, but mostly thanks to things that were done in the past. I do not think it is permanently damaged. I believe that the negative sentiment is temporary. In equity holdings, we have not seen any significant drop in the equity holdings of foreign investors. We can trade whether foreign investors are buying or selling. There has been a sell-off, but it is mostly related to global EM sell-offs in my opinion.
Finansinvest was incorporated in 1996 and has since grown into a market leader in investment banking and financial services. Can you please tell us a little about that journey?
Currently the key institutions are bank-related institutions. The only reason for this is that as the financial services industry has not been growing in line with the Turkish economy, the banks took the initiative to get involved in different businesses and set up different companies. Finansinvest also started with a law change back in 1996/97.
The Capital Markets Board said that from now on, you cannot be a broker and a retail bank at the same time, so they had to spin off their investment services business. So most of the companies were established back then. But since then, in line with Finansbank Group, we consider ourselves to be an innovative and customer-focused group.
Compared to most of our other competitors, Finansbank is a financial services only group. So our business is focused on the financial services industry. If you have a 20% real interest rate, you would rather buy into equities or look into alternatives, chasing returns etc. But now, we see that our high-net-worth individuals and institutional investors are looking for better returns, services and alternatives.
Our major role at Finansinvest is to become a leading, fully-fledged investment firm, not just giving you the opportunity to connect into different markets and products, but also to provide you the idea behind it. I believe that as the industry players, we should be focusing more on guiding investors through this volatile time.
If the industry is going to grow, and if we would like to see more equity investors and investment funds for instance, we should feed them, because most of them are not knowledgeable enough to make the right decisions. They do not know how to diversify or balance their risk in a portfolio. They do not even sometimes understand the risks they are taking while they invest into a product. It is crucial for us to guide them in the right direction, so that in volatile times, we do not end up hurting lots of investors and leaving them with a bad taste in their mouths, which they will remember for a long time.
From our perspective, research and investment advisory is very critical, as well as technology. We should offer the best technology and the fastest and cheapest solutions for our retail and institutional investors, but at the same time, we should put an investment advisory or guidance behind it and ask for additional fees through the additional services we provide. It is very easy to start, so market access is not crucial or something that you can use to differentiate from your competitors. It is about technology, better services and investment advisory in the future.
I wanted to congratulate you on being Turkey’s top investment bank in 2012, according to Global Finance magazine. What idiosyncrasies or competitive advantages do you think enabled you to achieve this?
There are a number of factors. To be honest, especially in the financial services industry, the major difference is through people. It is not the office or services. The entire infrastructure is cheaper, and readily available to anybody. As long as you invest a couple of million dollars you can buy the latest software, the latest infrastructure, hardware etc.
I think here at Finansinvest we have a very positive team. They know exactly what they are doing, and they are ambitious to work together. In November last year, we were able to make the largest SPO (capital markets offering) in the Turkish market. The whole deal was a result of great efforts between our investment banking division, operations, IT and Finansbank working closely together and trying to understand each other. Creating a very strong team was the crucial factor behind this success.
When we interviewed Dr Turhan from Borsa, he stressed that he believes that the capital markets will be Turkey’s engine for growth. Do you see the same potential, and how are you positioning yourself to capitalise on this?
I believe that there will be two totally separate, different pictures – the last ten years and hopefully the next ten years. One of the reasons for this is the fact that we have all the necessary ingredients in place. There are two factors – the retail investor base is going to grow in my opinion, because the policy makers are supporting it.
We have a new law and with this, the industry is going to be transformed. We will have a group of powerful investment services houses, which will offer various products to various clients. The product base will grow much faster than in the past and also, with the Istanbul Financial Centre Initiative, I believe that the issue of the capital markets and financial services industry will continue to be the focus of the current government and the governments of the future. I believe that the capital markets will help us big time.
However, some of the government institutions like Borsa Istanbul were not supporting the industry as much. The industry was not that keen on trying new things and delivering new products and ideas. Also, even if you were able to do it, it was not easy from a regulatory and other perspectives. But the new capital markets law is now reviewing all secondary legislation and the old Istanbul stock exchange is now Borsa Istanbul and all the exchanges are merged under one roof.
There will be significant technological investments, which is very crucial in my opinion. We will be able to attract not just retail investors, but also foreign investors. Turkey is now an investment grade country. Now Turkey has two investment grade ratings from two different agencies. I think we will face the same issue that I was telling you about. The industry will grow with a totally new set of investors, who have probably not bought any shares in the past or non-time deposit type products.
I believe we will see the same trend for foreign investors as well. We will see a totally different set of investors who have not been investing in Turkey much, but Turkey will now be on their radars. Your Turkey report may also help that initiative. We should be offering new investors the best technology and international standards, not just for Borsa Istanbul, but for our research and technology and our market access products. We have to be ready to upgrade the entire system and industry to international standards. I believe Borsa Istanbul will be a big supporter of the entire project.
And their recent strategic partnership with NASDAQ will certainly help that.
It definitely will. It is crucial from two aspects in my opinion. Firstly, it will add significant value to the credibility of the Borsa Istanbul. As I said, if you are a portfolio manager sitting somewhere in the US, who does not even know where Turkey is, but who invests in global markets, if they start investing in emerging markets, and see the NASDAQ brand as the exchange platform, I believe they will definitely have a more positive view of the market. Also, the technology and know-how they bring in will affect the quality of services that Borsa Istanbul provides its members, and of course our services we provide to institutional investors. So there will be new businesses opening up as well.
According to Ernst and Young, the Islamic banking sector in Turkey is going to triple over the next ten years, to be worth over $100 billion. Do you see the same potential for Sharia-compliant products and instruments?
As far as I can see, it is a global trend. It is not just Turkey; Islamic banking is growing in all different markets, even in developed markets. I believe that it is going to be a growing segment of our industry as well. I think the major problem is that we already have a small equity investment base, so if we consider Islamic products, as a percentage of the whole picture, it will grow in line with or faster than equity investments. But we have to grow our core business first. Equity markets should also grow in line with the economy, and then Islamic products will grow accordingly. It is good from our perspective.
There are lots of issues, problems and obstacles that you deal with on a daily basis, but on the other hand, it is a great opportunity because we have the chance to look at other markets and see what has failed and what has succeeded. We have a chance not to reinvent the wheel in many areas of our industry. I believe it is going to help us.
Turkey is a developing country and we have lots of issues and problems, and there are things that we try to do better, but if you look at it from a positive perspective, I think it is great because we will be able to learn from other markets. We have the luxury not to make the same mistakes. For example, we are one of the most innovative financial services houses in Turkey. Finans Asset Management introduced exchange traded funds back in 2005 and all our ETFs were developed to international standards.
It was relatively easy for us, because you can talk to people who made them work in other markets and you can easily transfer know-how. I think this is the right thing to do in our industry – we should not try to come up with an idea that nobody has ever thought of – instead we can just use global models, technology and everything. It will be easier for us to catch up.
Know-how is something that I really value, and if there is know-how available, I think we should benefit from it. Borsa Istanbul is doing exactly the same thing. It is now a joint stock company, but if the Turkish Government would like to spend $100 million to make Borsa Istanbul a great place in terms of technology, they can do it easily. But it is not just about the products or the services you get – but how to get the greatest benefit or how you can use it to serve your clients, customers or members better is a totally different issue. That is why I see that they also value know-how and create strategic partnerships with well-known institutions.
London is arguably considered to be the global financial capital, with a GDP higher than some European nations, including Belgium and Sweden. Considering Istanbul’s aspirations to be the regional financial hub in the Middle East and the MENA region, what do you think Istanbul can learn from London, especially given your vast experience?
I think there should be a different strategy for Istanbul becoming a financial centre. We should realise that in the near future or in the mid-term, we cannot be London. We aim to differentiate ourselves and offer something that many of the financial centres cannot provide. We have lots of competitors; not just London, New York, Shanghai or Singapore, but also lots of potential competitors in the region too. From Istanbul’s perspective, we have the right ingredients but there are lots of improvements that need to be done. I believe we should be positioning ourselves in a different way. This means that time is critical.
The financial centre is not just focusing on your assets, but you should also be able to offer various global assets and products to global investors to become a hub. When you look at London’s financial performance, I wonder how much of that is related to UK business or fixed income. Probably not a big portion. London is a major centre for all the emerging markets, especially Russia, Turkey and South Africa.
Instead of trying to create a financial centre that offers Turkish assets just to Turkish or foreign investors, we should go back to Istanbul’s old flavour – which is the route to all trades. It was physical in the past, but we should use it for financial assets now. I believe that Istanbul is a very strong candidate to be a financial centre now, or to become one. When it is, we will see a South African investor buying Russian bonds on Borsa Istanbul. I believe that this is the mentality we should have if we want to grow.
One of the major lessons we can learn from London is how much of their overall business is coming from UK retail investors and how much is coming from global institutional investors or global money. I think this will be a major issue.
In terms of expats, Istanbul is a great city to live in, so I do not think companies would have a hard time sending people to Istanbul to live and work and everything. But of course, the social aspect is also very important. They should have good schools for kids, which we have. Traffic is a bit of a problem sometimes, but it is a problem everywhere. I am very optimistic about the Istanbul Financial Centre. I do not see it as a dream or something that will never happen.
What final message would you like to send to our million plus readers about Finansinvest or Turkey as a whole?
I would strongly advise them to visit Turkey, not just Istanbul. When they come to Istanbul starting from the airport, they will see and feel the vibe and the dynamics, and the active, vibrant economy. They will feel that there are lots of things going on in the Turkish market, and I believe that this is very crucial. Not just for the financial services industry, but for whoever would like to do business – Turkey is the right place to do so. Considering that the average per capita income for Turkish citizens is growing, it will be a matter of time before Turkey becomes a major market for all industrial and finished goods.
From the financial markets perspective, I believe that Turkish companies offer excellent value. If you believe in the Turkish market and if you invest in the medium to long-term, then you will definitely reap the benefits of investing in this strong, growing and exciting economy. Especially with the recent changes in legislation and better rights for minority shareholders and a better technology structure for Borsa Istanbul. I believe the financial services industry will also grow.
The Government has a target to grow the existing pensions business to 400 billion Turkish Lira by 2023. It is currently around roughly 20 billion, and only 15% is invested in equities, which is only 3 billion. I believe it is much higher in other markets, but 30% will be invested in equities. So just for equity investments, 3 billion today to 120 billion over the next ten years means that portfolio managers will be pouring money into Borsa Istanbul.
I hope that we will see lots of new IPOs coming into the market – not just known Turkish institutions, but foreign institutions as well. In today’s prices this is roughly $60 to 65 billion, which is a lot. I believe this will have a positive effect on the equity market. Prices and liquidity will be higher, so in terms of the financial services industry, I am optimistic. I would like to invite people to get benefits from it.
There are not many markets out there where you can easily go in and out. It is very liquid. It also has a growing economy and a young, vibrant population. I think all the critical factors are in place. From our perspective, our main goal of course is to grow our business and betting on the growth of the business, rather than cutting costs or remaining small. We believe that the next ten years will be fantastic hopefully and we should be ready for it. The only way to do this is by investing in people and in technology. We will be investing heavily in those areas. I believe now is the time to invest in Turkey.