Turkey, which until now was one of the star performers amongst the emerging markets, suddenly saw its fortunes fall as the melt down in the global financial markets hit it hard. However, local issues are more to be blamed for the market mishap.

Until recently, emerging markets were the hotbed of activity for foreign investors, as they pumped in billions of dollars, chasing stocks, bonds, and for that matter, assets, of all hues. According to an estimate by the USbased TrimTabs Investment Research, the US investors, both individuals and hedge funds, so far invested close to $500 bn in emerging markets since 2004. Amongst these markets, Turkey had emerged as one of the star performers with unprecedented political stability and fiscal prudence during the regime of mildly Islamist Prime Minister, Recep Tayyip Erdogan, who boosted investor sentiment. This propelled ISE's (Istanbul Stock Exchange) benchmark index, National 100, to gain a massive 400% between October 2002 and February 2006; it jumped from 10,370 in 2002 to 47,015.88 by the end of February 2006. As the country's economy grew and talks of accession to EU gathered pace, it bolstered the investor sentiment further.

The country was marching ahead until foreign investors decided to pull the plug. As a result, the country's stock market has seen a reversal in its fortune since March 11, after being the hardest hit among the emerging markets. Since then the stock market has lost heavily; it lost close to 28% in the last four months after touching the historic high of 47,016 in February this year, as a string of bad news made investors jittery. First, it was the crash in lira, Turkey's currency, which in May alone, plunged by as much as 17% against the US dollar. A recent upsurge in inflation only dampened the market sentiment. The inflation rate which was under control since 2004 rose unexpectedly to 8.8% in April, and then to 9.9% in May. And even before investors could digest these developments, the concerns about Turkey's current account deficit, which was showing an increasing trend since 2004 and had touched $25 bn in April 2006, grew. Although many experts rule out the worry on current account deficit front as the reason behind the recent outflows which have halted the bull run, they do suggest that if it becomes a trend, it may add to the volatility in the domestic market further.

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