Following the coup way back in 2016, many might have believed that the Turkish lira had indeed bottomed, primarily versus the US dollar. However, the recent turmoil emanating on the political front has once again triggered a volatile momentum, with the currency plunging by over 20% versus the US dollar.
Many had expected that the Turkish central bank would have acted swiftly by raising interest rates. However, to the surprise of many, Turkish monetary politicians opted for a pedantic approach by delaying its decision. Us market participants are aware that despite being pictured as an independent body, the Turkish Central bank is still subject to the manipulation of Erdogan, the Turkish President.
Let’s be frank: over the past years Erdogan ensured that his position is in no way under threat by tweaking constitutional laws. Primarily to outsiders, this was and is still seen as a threat towards the fundamental elements of a democratic nation. To this extent, the recent manoeuvres has led market participants to dispose of their Turkish assets, as the fear of another increasing political turmoil is seen as a possibility.
In all fairness, this is not the first time that such domestic political approach is taken by Erdogan, in addition to the tit-for-tat comments with Europe.
The recent plunge of over 20 per cent in the Turkish lira versus the US dollar has also triggered a sell-off over dollar-denominated debt issued by Turkish corporations, as market participants opted to abide by the theoretical approach- a weakening lira would imply higher financing costs for Turkish dollar issuers to service its debt. Undoubtedly, the rationale for such approach is uncontested, however as I have repeated several times, digging into the credit story such approach might not make sense to a certain extent.
In my view, the sell-off on such bonds might have indeed created opportunities for investors who are continuously in search of more attractive yields as opposed to the yields being put forward by European counterparts. Yes, if you opt for a bottom-up approach rather than a top-down approach in your investment selection, you might opt for a different investment decision.
A pure example is with one of the largest Turkish telecommunications operator in Turkey, Turkcell, which is leading the market share domestically within the industry with over 50 million subscribers across their operations. Bond investors dumped Turkcell bonds denominated in US dollars as the Turkish lira plummeted.
However, would the sell-off approach make sense when in reality the company is very pro-active in mitigating currency exposure? Yes, the company is very active and in actual fact, after hedging their dollar exposures, the company has merely a 35% exposure. Furthermore, one should also consider the fact of the ongoing possible developments in its business model, which are supported by the strong Turkish demographics.
Following the stubbornness of Erdogan, last Monday, Turkey’s central bank decided to more than double its one-week repo rate to 16.5%, in addition to the possibility of further increases if need be. Unsurprisingly, this seemed to be a catalyst as the Turkish lira soared, as markets cheered the monetary action with Turkish equities and bonds also gaining on the news.
Thus, at times what seems to be a risky position might indeed turn out to be an opportunity when volatility prevails.
This week, I was having a chat with a very good friend of mine, who works within the industry. He put forward a clear argument that volatility nowadays is the order of the day and in this regard, investors have to adapt to such evolving financial markets. He is totally right in his argument and investors have to accept the fact that as opposed to previous cycles, this time round volatility levels are more elevated. However, if one is selective, prudent and able to manage risk, financial markets can still offer returns. Take the opportunity and take advantage of volatility to succeed.
Disclaimer:
This article was issued by Jordan Portelli investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.