The man behind the mustache


Jules Rimmer worked in investment banking for 32 years, primarily in emerging markets. He is now a freelance journalist.

A crisis is temporary in nature, but the Turks redefine the term to incorporate a sense of permanence. Turkoparalysis perfectly encapsulates the sentiment investors have of frenetic but immobile economic activity. For years, the economy has faced runaway inflation, a mile-long current account deficit, a plummeting currency and a balance of payments emergency. The reasons to capitulate are legion.

How is it then that the best performing emerging market of 2022 is none other than Turkey? Defying predictions of another year of disastrous returns, Turkey’s benchmark XU100 rose 33% in dollar terms, convincingly outperforming its peers with the MSCI ME index fall of almost 20% since the beginning of the year. In a high/low lira inflation environment, a jump in the local currency equity market should not come as a surprise, but the performance of Turkey’s hard currency has bewildered expectations.

The outperformance was mainly recorded during the summer months with a recovery of around 50% in the overall index, the main engine of which was a 160% increase in the banking sector. Volumes soared, hitting an all-time high of $7.6 billion last week. How to explain this movement, defying a degraded economic situation and any logic of investment?

Sure, banks were cheap by any standard valuation measure, but they always were, and that didn’t precipitate the five-year spike. Foreign ownership of the Turkish market languishes around 33%, barely above its all-time high. The regulatory changes imposed by the The Turkish central bank forced the banks have highly profitable IPC bonds and invest in local currency government bonds. As a result, yields on the latter fell 1,000 basis points and traded via Eurobonds despite CPI measuring between 80% and 150%, according to the trusted forecast.

Analysts have cited these circumstances as possible explanations for the puzzling surge in stock prices. There were other leftist suggestions: the light hand of Turkey’s sovereign wealth fund, perhaps? Retail Investors Capitulating Crypto and Invading Stocks? The probable cause, however, is more mysterious.

Turkish investors who, for legitimate or not, store their wealth abroad and reinvest it in the stock market have long been a powerful determinant of asset prices on the Istanbul Stock Exchange. Brokers colloquially call them “the moustaches”. In 2016, one of them, who rose to notoriety as The Dude, was said to be responsible for huge swings in stocks.

Come the summer of 2022 and the local discourse has been of another shadow figure. According to market commentators, a speculator placed a series of highly leveraged bets on single stock futures in bank stocks in July. These contracts are not particularly liquid. The deals – which started with smaller banks and initial positions of only TRY 100-200 million – led to a squeeze as arbitrage players exploited the gap between futures and cash.

The derivatives craze coincided with a period of relative stability for the pound as Turkish President Recep Tayyip Erdoğan brokered swap deals and loans with the Saudis and Russians and the oversized retail investor base Turks desperately pursued the movement.

If rumors are to be believed, the exposure of the lone bettor has increased to 20 billion TRY, which gives a paper profit of around 2-3 billion. In a market characterized by regulatory vigilance and overseen by an obsessively panoptic finance ministry and central bank, these moves simply could not have gone unnoticed. The approval could at the very least be considered tacit, if not explicit.

The authorities are quick to cry economic sabotage whenever the market falls, but they were apparently ok as long as the direction of asset price movement was higher. There are virtually no constitutional limits to Erdogan’s power; a freely traded lira is the only thing beyond his control.

For the government, the relief of economic pressure is always welcome, whatever the source. Allowing retail punters to skim the scum of a bank rally might have dampened criticism of the AKP’s surprisingly clumsy mismanagement of the economy, if only for a moment.

At the end of last week, however, there were signs that even the central bank was uncomfortable with the bubble created and the minimum collateral required for margin positions was increased by 30%. Local brokers facilitating the execution of so-called mustache trades have also raised margin requirements. Suddenly, the momentum lost momentum and consecutive limit cuts were recorded by bank stocks.

Getting out of a high leverage position will be harder than it was getting into it. The cumulative effect of the market turmoil is to discourage international institutional investors. Potemkinisation of the stock market means stocks don’t represent economic fundamentals, volatility is off-putting and with Turkey only holding a 37bp weighting in the MSCI EM, fund managers can easily afford to ignore the circus.

The outperformance of the Turkish market is an optical illusion. Stay away.


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