Volatility Due to Incoming Election

Volatility Due to Incoming Election

We didn’t have to wait for March and April for election volatility. It showed itself in the first month of 2023. I wasn’t expecting such early and severe movements. Otherwise, I would have reduced the weight of the Financial Independence Portfolio of the Istanbul Stock Exchange earlier. Anyway, due to health and family reasons, I haven’t been able to publish any writing for the past month. Sorry about that. From now on, I aim to post at least one essay every week. Let me explain what I’ve been doing for the past month and what I expect as a small investor in 2023.

The election will determine the fate of the country

The general election, which is expected to be held on May 14th, will determine whether Turkey can exist as a secular democracy -at least in my lifetime. In this respect, all other issues don’t matter. Nevertheless, let me give my opinion as an investor: this election contains two different future scenarios. On one, the existing populist economic policies continue full steam ahead. At the same time, on the other, there is a return to orthodoxy. No one knows which will be realized. Therefore, foreign investors are still making a final escape from the Turkish capital markets. The artificially high maintenance of the Turkish Lira against foreign currencies also gives them a great advantage.

Reducing my home country risk

If populism continues

My strategy is similar. If populist policies continue to be on the agenda, the country may soon face a balance of payments crisis. Even if it does not, Turkey is following the path of Lebanon and Argentina. The latest one is a different exchange rate for exporters. You can check here for details. The separation of the exchange rates is a critical indicator of the future value of Turkish assets. In short, I made two sales on the Borsa Istanbul stock exchange recently. As you know, I invested all my money in Borsa Istanbul on Tupras. However, when I was worried about the situation, I sold a third of my shares at 492 TL. After seeing yesterday’s volatility, I sold half of the remaining shares at 556 TL. My average cost was around 11 dollars, which means a figure of 11 * 18.8 = 206 TL today. I couldn’t buy at the lowest and sell at the highest. Salute to those who can. 🙂

If there is a return to orthodox policies

If the return to reason happens, it would be good news for Turkish entities in the long run. However, it won’t be very positive in the short term. Policy interest rates will sharply increase, and market interest rates will also turn positive in real terms. In this case, the real return potential of Borsa Istanbul will significantly decrease. The interest of local investors in the stock market will fall. Foreign investors can bring capital from abroad, but I assume they will prefer to observe the situation before making a significant investment. Additionally, they would also expect prices to cheapen in terms of dollars. So, within this scenario, if I can find well-managed corporate companies with devalued prices in dollars, I can invest more in Borsa Istanbul.

Asset allocation

As of today, the following chart shows the latest distribution of assets in my portfolio. As seen, I have decreased the share of Borsa Istanbul (Tupras) to 5%. I limited my home country risk with Turkish Treasury Eurobonds, which make up %27.3 + %5 = %32.3 of my portfolio. If things go badly and Tupras drops back to the $10 limit, the impact on my portfolio size would be -2.5%. Of course, in this case, I would also see a 5-6 point loss in value in the Eurobond section. So, in the worst scenario, I would keep the loss in my portfolio below 10%.

Asset allocation, 3/02/2023
Asset allocation, 3/02/2023

Eurobond challenge

I wanted to reduce my home country risk further. Still, they can artificially hold up the Istanbul Stock Exchange, just like the dollar/TL exchange rate. Considering this possibility, I did not sell all of my Tüpraş shares. However, I will exit the Istanbul Stock Exchange if I see the prices at 630-650 TL. On the other hand, I also considered reducing my Eurobond portfolio. However, I would suffer a significant loss as the domestic brokerage firm’s bid-ask spread is relatively high. I wish I had discovered Interactive Brokers earlier. Two more things relieve me on this subject: (1) With the cash flow I have generated in the past four years, I have saved roughly 40% of the capital I invested in these bonds, (2) I have not made any purchases, except for a test purchase, to limit my country risk for the past two years.

Treasury Eurobonds are just one of the options. I can also get 8-10% returns from private company bonds. Furthermore, the credit risk rating of these companies is currently better than Turkey’s. 🙂 In the future, I plan to use high-yield junk corporate bonds instead of Treasury Eurobonds to increase my cash flow. At least until the fate of the country becomes apparent. I have not made any purchases because my priority now is not to increase my cash flow under current conditions.

In conclusion

I don’t want to spend sleepless nights worrying about money before the election. After all, the strategic goal I set at the beginning of this journey was to have peace of mind about money, no matter what happens in the country. The way to achieve this strategic goal is to reduce country risk by investing in foreign markets. Today, I shared my thoughts and actions on investment conditions in the country. Let overseas markets be the subject of my next article. Have a good weekend.


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