Being a contrarian investor from 2016 to 2018 was not very exciting as things were steady, mild and maintaining the status quo. However, even during this time, Turkey was shaping a disaster. Mainly, its currency (₺ lira) has been declining in value rapidly, which contributed to rising inflation, and things were about to get out of control. Today, April 2022, things did get out of control, and Turkey is now experiencing one of the worst economic times in its entire history. I have been following Turkey's downfall for many years, patiently waiting for the opportunistic moment to invest in.
The current state of Turkey
Turkey's two biggest problems are the
- Currency devaluation
- Rising inflation
Turkey's currency has been devalued steadily for the first half of the last decade, and then it just took off. Below is a chart comparing the USD ($) to the Turkish lira (₺).
- In 2005, USD $1 = ₺1.344
- In 2021, USD $1 = ₺12.5
In the UK, where I live, we are worried about the inflation rate hitting 4-5%. Turkey's inflation level is off the chart by that standard, currently at greater than 50%.
I can't even imagine what it would be like to live in such an environment where my entire life savings get halved in just a couple of years.
What caused the crash?
There are just so many things that have gone wrong with Turkey that it's no wonder the economy is at its lowest point in history.
- Turkey experienced rapid economic growth in the 2000s, heavily financed by borrowing a lot of money from private lenders in the USA in US dollars ($) and European governments in the euro (€). If you remember from the economic cycle guide I wrote, economic growth fueled by borrowed money will be followed by a recession to pay back the loans. Turkey is in need of selling the lira and buying foreign currencies to pay back the loans. Offering more lira to be sold on the market means devaluation for that currency.
- President Trump's tariffs on steel and aluminium plunged the Turkish lira amid a widening dispute over the imprisonment of the US pastor.
- Turkey's increased censorship of financial data drove foreign investors away, making the lira less attractive.
- Turkey's President Erdogan intervened in the central bank policies by lowering the interest rates, which is the opposite of the traditional wisdom and ended up being completely wrong. Lower interest rates made holding the lira unattractive since there are fewer profits to be made by lending money in the lira.
- The massive devaluation in the lira meant that the imports were now too expensive. Since the supply of everything drastically decreased, prices of everything started soaring up.
What still astonishes me is that President Erdogan fired three central bank governors since 2019 every time they tried to raise the interest rates, which is the right thing to do in an inflationary environment.
Why invest in Turkey now?
At the time of this writing, Turkey's inflation rate is at its highest point, between 50%-60%. The Turkish government has come up with various policies as the last resort to survive through the winter until the summer tourist season.
- President Erdogan has committed to stop lowering the interest rate and fixing it at 14%.
- The new savings policy encourages people to save money in the lira, and any amount of money lost due to inflation will be matched by the government with free money.
With these new policies in place, many experts are now saying the inflation rate might come down to half of where it is by the end of 2022. Now is a great time to invest in Turkey in anticipation of the summer season when many tourists will seek to benefit from the plummeted lira. On top of that, many countries have lifted the COVID travel restrictions entirely, which further boosts the number of travels that translates to the increased demand for lira.
What can you buy?
An ideal investment would be ETFs that aims to track as closely as possible the returns of the MSCI Turkey index. This index is made up of the largest companies in Turkey.
As with any other contrariant position, this is quite a risky investment, and you should look to invest a maximum of 3% of your portfolio.