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Turkish lira is falling. Why and how to capitalize on this?

The rate of the Turkish lira has been in a noticeable downturn for the past several years. In 2013, for each U.S. dollar, 2 liras could be bought, in 2017, it was 4. But in the past several days the devaluation has sped up. One U.S. dollar now costs 7 liras, and the fall looks almost vertical. So what are the reasons behind what is happening and how to capitalize on this?

Why is lira falling?

Imminent reasons. These are the ones discussed by the mainstream media to explain the current crisis.

1. American sanctions. Recently the U.S. has announced sanctions on two Turkish ministers while President Trump has tweeted "I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey" adding that "Our relations with Turkey are not good at this time!"

2. "Economic terrorists." Apart from the U.S., Turkey also blames the so called unknown "Economic terrorists on social media" which provoked the fall.

Fundamental reasons. In truth, the lira has been in a downward trend for a number of years, and recent developments simply tipped it over the edge.

3. Economic populism of the government. A prolonged devaluation of lira is not an ‘oversight’, but an intentional policy of the Turkish government. For some time it printed money in large volumes in order to address the short term socio-political goals. For example, raising the pensions in order to obtain more votes during the election form the elder population. In 2006, the amount of issued money came down to 300 million liras, in 2010 it became 500 million, in 2014 it doubled to 1 billion to now which is nearly 2 billion. The government wasn’t that constrained with borrowing either: at present, Turkey’s external debt comes to $480 billion, nearly a half of their GDP. And even now, when the fall is turning into scary proportions, the government refuses to slow the decline down through the traditional economic tools — like raising the base credit rate. Instead, it chooses to look for enemies.

4. Expectations of inflation. Citizens of Turkey have become used to living in a permanent state of devaluation and are not expecting anything good to come of their currency. A similar situation occurred in Russia in the 1990’s: Hyperinflation in 1992-93, stabilizing in 1994-97 and then a further fall in 1998. Psychologically and financially (if holding the savings in foreign currencies), citizens could be ready for such a downturn. People would not be willing to protest against the decline while the government wouldn’t need to worry about the fall. But all this only increases the likelihood of a financial crisis.

How can I capitalize?

1. Betting on a further fall of the lira? With care. Given the lack of desire on behalf of the government to raise the base rate, in most likelihood, the floor has not been reached just yet. Short positions on the lira could turn out to be profitable, but that process is highly unpredictable. For example on August 14, lira has bounced off the $7 mark and the fall is likely to continue, but that’s a risky game.

2. Buying up cheap Turkish stocks. But not all of them. Then lira reaches the lowest point, it’s worth buying it to spend on Turkish stocks. With EXANTE, they can be found at Stocks and ETF > BIST: Borsa Istanbul. In-depth information on every firm can be found on financial websites such as finance.google.com, finance.yahoo.com. Take note of the two categories of stocks.

2а. Undervalued stocks. When evaluating the investment attractiveness of companies, a great importance should be placed upon the P/E coefficient – the ratio between the firm’s capitalization to its earnings. This info is published for each stock on main financial resources. Those with 2-8 P/E ratio – shares of profitable companies, as they have room to grow. Extremely low P/E < 2 are better to be avoided.

2b. Stocks of exporters. Once again as an example of Russia shows, following 2014, export firms shoot up in price in the domestic currency after it’s devalued – simply because the profits are received in foreign currencies. This should be taken an advantage of. Even if the lira doesn’t rebound after the fall, and will continue on its downward trend, these stocks in the most likely case will rise in price – maybe even by several times over.

Which stocks for example?

Adana Cimento, which is traded under the ADNAC ticker (Stocks and ETF > BIST: Borsa Istanbul > ADNAC). Here’s the page on finance.google.com. The firm deals in manufacturing and exporting concrete. It has a relatively low P/E ratio, at 2.58. The stock costs 1 lira which means almost any amount can be invested.

Petkim Petrokimya, trades under the PETKM ticker, (Stocks and ETF > BIST: Borsa Istanbul > PETKM). Here is the page on finance.google.com. It’s the largest producer of chemicals based on oil and gas — polymers, cleaning detergents, and packaging. Most of their products are exported and P/E of the company stands at 8.04. Looks like a good opportunity given that its shares are priced at 6 liras.

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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