Turkish Market about to Crash. Any Point in Taking Risk?

By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

It is an open secret that crises are the best times to invest. During a crisis, companies become cheap, sometimes several times cheaper compared to the real value. Investors who do not rely on emotions think of sharp market falls as of a unique chance for finding and buying such company stocks. However, an even better time to invest is during a correction, which is inevitable when any market is rising.

There are a few investment methods during crises:

  • The first one is finding some particular companies. Those should be the companies with the best outlook, but the risks are high, as you never know this very company will react to the crisis.
  • Another method is more simple, and consists in investing into a particular industry. In this case, you won’t need to analyze certain companies, betting on an entire sector instead through buying an index.
  • Finally, the third method is investing into exchange-traded funds, or ETF’s.

An ETF is a portfolio based on stocks, commodities, currencies, bonds, or interest rates, that usually replicates a certain stock index. By buying an ETF, you invest not only into a particular stock or industry, but into the country’s economy as well. Meanwhile, as ETFs consist of multiple financial instruments, they are the most safe forms of investment, and one of the most popular, too. Many ETFs are traded in the US market, where an access to any exchange means an opportunity to invest into any asset being traded around the globe.

Lately, the Turkish lira depreciated so much that many market participants started to watch it. The EU market was one of the first to suffer, which led to the US dollar rising and investors leaving high risk assets.

The major Turkish indices were meanwhile going down steadily. The stock market started plunging as early as in April after the US imposed customs duties on steel and aluminum (25% and 10%, respectively). In mid-August, the US doubled these rates, which led to the Turkish stock market going down further.

Bist 100: Turkish Stock Index

The reason for the stock indices going down was not the crisis, though. The depreciation occurred at the same time of the US imposing the duties; this could influence the metal industry negatively, but for other companies exporting their products abroad cheap lira was a good thing, as prices became more competitive. This means that the Turkish economy is very much under-priced, and while the indices are going down, this is a great opportunity for a long-term investment. This also allows one to clearly see the reasons for Trump’s having imposed the duties.

When the US imposed customs duties on China, the PBC started depreciating the renminbi in order to neutralize the effect. The same happened in Turkey, although the central bank did not take any part in it, the lira lost much more than it should, while steel and aluminum got cheaper, even taking the duties into account, which turned Trump’s effort totally useless. Of course, the only thing he could do in this situation was raising the duties.

It is considered obvious that Trump’s imposing duties lead to a stronger dollar. At the same time, in case the countries take some counter-measures, exporting from the US may become a few times more expensive than before.

When a crisis occurs, the central bank usually cuts rates in order to stimulate inflation and export and allow businesses to take affordable loans. In Turkey, however, inflation is already beyond control, and the government is on the verge of a disaster. On the one hand, they need to stop the inflation by raising key interest rates, on the other, they have got to support the businesses, and, to that end, leave the rate unchanged. The Turkish central bank run by the government finally chose the second option and do without a rate hike, which is a good signal for the stock market. In case inflation turns slower, this decision may turn out to be very good in the long run.

Perhaps this was the very signal that served as a reason for a large cash flow coming to one of the Turkish ETFs. It is called iShares MSCI Turkey ETF (TUR), and some sources say the cash flow there was around $147.5M last week. This is the largest foreign investment amount since 2013. The iShares MSCI was second to only ETF iShares China Large-Cap (FXI), whose weekly cash flow was $165.2M. This all means that large investors are very much interested in the Turkish markets, seeing a lot of opportunities across it.

Another signal regarding iShares MSCI Turkey ETF (TUR) and the Turkish stock market, in general, is that the market is oversold. This is calculated through dividing the GDP by the overall capitalization of all stocks being traded publicly.

When it is less than 50%, the market is usually considered oversold, and this makes a good buy signal, while in case this parameter is over 150% (often happens in the US), this means the market is overpriced and a correction is coming.

In Turkey, the high was as low as 50%, while the low is 10%. Currently, this percentage is 15%, which clearly indicates the market is heavily oversold.

The Turkish economy got such results only 3 times since the stock market inception, and every time before the fall changed to the rise by 30%, which, again, is a buy signal for (NYSE:TUR).

Technically, the interest towards the index is confirmed with a sharp increase in volumes. Currently, the resistance has formed around 22.00, and once it gets broken out, the ETF may continue rising to reach $33.00 or $35.00.

A more long-term period shows that TUR has reached its highs and is now trading near a very strong support, which may follow with a bounce, same like in 2008.

Disclaimer

Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

Having majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.