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New turn in Turkish crisis: will central bank save lira and what should investors do

What is Happening in Turkey

History

From the 2000s the Turkish government has been dealing with social and political issues by printing new banknotes and handing them out to those layers of society whose political support it needed. Early on growth in money supply went fairly unnoticed and had not resulted in much inflation. But in recent years the decline in Lira’s exchange rate started to accelerate. The fall culminated in August of 2018 when the USA introduced economic sanctions which provided a catalyst, particularly, 100% increase in import tariffs for Turkish steel and aluminum. If at the beginning of the year the dollar was worth 3 Liras, at the bottom it was fetching 7.

New Turn

At a critical juncture, the situation was exacerbated by President Erdogan’s refusal to raise the base interest rate. The Lira was at risk of further uncontrolled decline. But on September 13, the Turkish Central Bank in direct confrontation with the President raised the base rate from 17.75% to 24% – even higher than expected by pundits. Lira’s exchange rate rose by 3% but it is hard to say if the rise continues.

What should investors do?

Professionalism counts

In August the situation seemed predictable: Turkey was on course toward escalation of the crisis. Calls to short the Lira and buy cheapening Turkish stocks sounded logical. But now the situation has grown more complicated, according to EXANTE experts.

The opportunity is there but there are no risks-free strategies. Fundamentally all depends on the single factor – if an improvement in the Turkish financial climate is coming. The optimists can purchase Turkish government bonds or bet on BIST 100, the main equity index of the Istanbul Exchange. One can also buy futures on the same index. For the pessimists – shorting the Lira and selling BIST 100 futures. But these are not recommendations for novices. Not just potential gains but also risks are pretty high.

What is left for novices

In contrast to such professional activities as trading futures, a rather democratic option is purchasing shares of export-oriented companies. After a Central Bank rate increase Lira may firm up and stabilize but a renewed fall is unlikely. Turkish stocks are cheap. There is a high degree of certainty that at present it is still a good time to buy them. They can be found in the EXANTE platform under «Stocks and ETFs > BIST: Borsa Istanbul». For instance, the shares of cement producer Adana Cimento (ADNAC) or oil company Petkim Petrokimya (PETKM) look attractive.

Though, EXANTE experts believe that even here unpleasant surprises are possible. For example, the USA may enact new sanctions (previous ones concerned the exporters specifically). Or even nationalization of companies which may be undertaken by the populist government in the event of the further worsening of the economy. Not only the low exchange rate of Lira but also these risks are the reason for the low valuation of Turkish stocks.

The information in this text is provided to you for informational purposes only and should not be regarded as an offer or solicitation of an offer to buy or sell any investments or related services that may be referenced here.

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In August 2018 EXANTE became the member of ISSA – International Securities Services Association.

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