Currency Fluctuation and Its Effects
Currency fluctuation in an election period in Turkey is seen as remarkable by foreign investors. It brings a lot of questions, hesitation in investment decisions, and opportunities at the same time. Three important points should be examined in this kind of market situations:
- What is the real reason behind the currency volatility?
- Is it speculative or not? Does currency reflect the real industrial situation?
- How to get protected from threats and how to address opportunities?
What Is the Real Reason Behind the Currency Volatility?
The Turkish economy has sensitivity against systematic risks which, in the current situation, heavily refers to the “political” infrastructure. Experienced market players in Turkish market focus on this risk and they have some typical movements to take advantage of those risks and cycles.
Political risks are priced strongly in general elections period in Turkey. 70% of the Turkish stock market is held by foreign investors in Turkey. Typical experienced players in Turkish stocks have two stock cycles movements. When the stocks are on a rise, they sell their U.S Dollar, change it to Turkish Lira and buy Turkish stocks through local currency. When the stocks are on a decline, they do opposite by selling their stocks and exchange Turkish Lira from sales to U.S Dollar then wait for another positive cycle.
General elections in Turkey increase the systematic risks very sharply and stock players almost always start to liquidate their stocks before 2–3 quarters from elections. They hold assets as U.S Dollar and wait to see the result. If the result of the elections is positive they start to inject again. That’s why generally Turkish stocks and U.S dollar moves are opposite.
We have some examples of general elections atmosphere in Turkey and how it affects the currency fluctuation. The graph below shows the 2011 general elections and the effects over US Dollar vs Turkish Lira currency market.
At the moment we see investor tendencies are focused on buying U.S Dollar and waiting till election results. If the political stability continues after the election they will sell U.S Dollar and keep holding Turkish stocks.
Now in Turkey, this “wait and see” tendency is combined with global U.S Dollar demand. U.S central bank is raising the interest rate of U.S Dollar and this increases the pressure over Turkish Lira vs. U.S Dollar.
Is the Rise Speculative or Not?
The currency may fluctuate according to market players however short-term sudden moves may not reflect the real economic situation. To understand the Turkish economy’s strength, one should check the industrial ratios.
Turkey has a growth rate above 3% per year even in these kinds of heavy conjunctures. You can see expansion following graph below.
However, this expansion comes with a high inflation in Turkey. So, every year value loss in currency should be expected around inflation rate, which is approximately 15%. Value loss in currency above 15% is not reasonable according to macroeconomic indicators.
“Capacity utilization reached the highest rate in 5 years with 78.8%”
Another example is the rate of capacity utilization. For an economy in a depression cycle, we should expect production to slow down and capacity utilization to drop dramatically. However, in Turkey, it is the opposite. We can see from the graphics below that between 2013–2017 capacity utilization did not go down, it increased. In mid-2017 it reached the highest rate in 5 years with 78.8%. Right now, it is around 75%, which is a very good ratio for Turkish industries.
Threats, Opportunities, and How to Manage
The divergence between the real economy and currency loss in Turkey brings unexpected threats and opportunities for inexperienced investors in Turkish eco-system.
First of all, the biggest threat is to manage the loss in the value of revenue streams. Your investment may make a profit in Turkey, however, if you cannot manage the currency risk, profits may melt down vs. U.S Dollar.
There is more than one way to manage this risk. The way of MaQasid is hedging the currency risks directly with some currency instruments. MaQasid balances out that risk constantly and does not get affected by currency fluctuations. On the downside, when Turkish Lira appreciates, we give up on profits due to the hedging instrument. All in all, Maqasid’s approach is to not take any chances on the currency risk, as it is very dangerous to speculate currency risk in Turkish market conditions.
On a positive note, the Turkish stocks are very cheap right now in U.S Dollar basis even though companies are profitable.
Bist-100 in U.S Dollar basis is around 22,000 USD right now. This price is almost average of 2008 crises value and the almost lowest price for Turkish stocks in last 9 years.
For the investors who want to inject U.S Dollar, it is a good time to move. Collecting the stocks right now before the elections and sell after in a stable political situation could give very good returns in medium & short time periods.
MaQasid is the first full-fledged independent portfolio management company in Turkey that is aligned with ethical and interest-free financial principles. MaQasid in its new shape as a licensed portfolio management firm, regulated by the Turkish Capital Market Board (CMB) rules and regulations, is managing to scale its operations and expand locally and internationally.
For additional information, questions and requests, please feel free to contact us directly.
MaQasid Portfolio Management publications are produced by MaQasid Portföy Yönetimi A.Ş., a Turkey-based portfolio management company registered with the Capital Markets Board of Turkey. The information and opinions herein are for general information use only. MaQasid Portföy Yönetimi A.Ş. does not guarantee their accuracy or completeness, nor does MaQasid Portföy Yönetimi A.Ş. assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice.