Should you buy turkish lira and shares now?

Road signs: Caution skidding hazard

Angela merkel's special friends recep tayyip erdogan and donald trump are bickering. There one would like to use almost the picture of the laughing third, if the situation would not be so serious. Now turkey's finances are getting more and more into trouble, and the president is calling on his people to exchange foreign currency for lira. Makes me wonder if this would only be something for true patriots. Perhaps there are also opportunities for real investors in turkey.

The situation remains confused

When I last vacationed in turkey a few years ago, 100 lira was still worth about 50 euros. Today it is only about a quarter of that (as of 13.08.). In recent weeks, the slide has accelerated massively after drastic sanctions were announced from washington.

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The list of points of contention is long, and it's nearly impossible for outsiders to sort out which of them is justified. From there I abstain from a judgement and wonder if this knot can be untangled. Erdogan has also threatened to look for new friends if the U.S. Does not back down. It would probably mean leaving NATO. With relations with russia, china, saudi arabia, egypt and europe also strained, this would not be so easy with the new friends.

But trump's wild west ways apparently make people more willing to look past historical and current differences. Turkey, china, russia, ukraine and forcibly iran want to conduct their business among themselves with their own currencies in the future and leave the US dollar out of it.

I also find interesting the just reported agreement on the caspian sea, where the central asian states have established a peaceful division of territory with iran and russia. The focus of turkish economic relations could also shift to this region. After all, the country already has the economic cooperation organization (ECO), an economic bloc that has not yet made much of an impact. Both iran and turkey may want to increase their involvement there and try to tie in the powerful neighboring countries of china, india and russia.

For the currency, all extremes are possible

The scenario described above, with a turn toward central asia together with iran and a break with the U.S., would probably initially result in a further crash of the currency. It can take years for something like this to settle down.

But regardless, are we really dealing with a case that could be compared to the longstanding over-indebtedness situation in argentina? Actually turkey was not extraordinarily highly indebted, the economy runs rather roundly and tourism booms.

However, a key problem here is also that devaluation makes loans in euros and dollars much more expensive, which causes rating agencies to lower credit ratings, which in turn causes more foreign capital to be withdrawn and central bank interest rates to be increased. In addition, there would be a high current account deficit with shrinking reserves. This could develop into a deadly spiral.

So now it's up to president erdogan to put the right measures in place to break this very spiral and build new confidence. In the best case scenario, the currency could then recover a nice chunk of its losses. Patriots who heed the call to exchange their hard cash for turkish lira would then have not only bailed out their president, but also made a good deal.

As a neutral investor, however, I currently see as much downside risk as upside opportunity, which is why I'm keeping my hands off it. In general, betting on currencies is usually a bad idea, because the professionals have an advantage.

What about shares?

Basically, yes, they say that stocks offer some protection against inflation. After all, revenues rise practically in step with the depreciation of money. In addition, competitiveness could increase due to lower real wages, which would boost exports. No wonder, export records are reported this year. Where no punitive tariffs are levied, washing machines, car parts and trucks from turkey should now be selling like ground hazelnuts in chocolate cream.

As the benchmark DJ turkey titans 20 index has lost a quarter since the end of february despite the currency's decline, investors from euroland and switzerland can now get in much cheaper. Calculated in euros, it has in fact smoothly halved over this period (as of 10.08.). While this sounds tempting, it is of course fraught with significant dangers. Nevertheless, if erdogan finds an elegant way out of the tricky situation, things could go up quite quickly. However, I would not rely on this.

However, if you know a bit about the turkish economic landscape, it might be worthwhile to lie in wait to strike at the opportune moment. At present, I would prefer exporters to retailers and financial service providers, because the risk there seems to me to be the lowest. First, however, it is advisable to wait a little longer in order to be able to better assess further developments.

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