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.

About MaQasid

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.