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What is the best way to invest in Turkey?

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There are very few consistent indicators out there in the world of investment.

The environment is ever-changing. Strategies that worked for years suddenly stop paying out. Infallible signals turn fallible. Things work. And then they don’t.

But here’s one that I reckon you can take to the bank. As soon as someone in charge starts blaming the media or short-sellers, you know that something’s wrong.

That’s exactly what’s happening right now in Turkey.

It’s never a good sign when the boss is blaming the papers or the hedge funds

Last Friday, US investment bank JP Morgan suggested that it was time to short sell the lira, after data showed that the central bank is running low on reserves with which to defend the value of the currency.

As a result, the Turkish regulator decided to launch an investigation into the bank, which it said was “misleading” clients.

This is proper banana republic behaviour. You won’t find me defending investment banks on a regular basis, but this is just an analyst’s job. And history has often shown that when an authoritarian government takes offence at criticism from a humble analyst, there’s usually a very good reason to be concerned.

But it didn’t stop there.

Long story short, the government, led by President Recep Tayyip Erdogan, told banks not to lend lira to foreign institutions. Put simply, this was to stop them from short-selling the Turkish currency. As a result, the cost of lending lira offshore overnight, soared to 1,200% – from about 22% last week (that’s 1,200% a year by the way, not per day).

So if you wanted to short the currency, you couldn’t. And it worked, briefly. But it’s not great for confidence.

The problem for Turkey is that if you make foreign investors fearful that they will not be able to get their money out of your country when they want to, then they will do two things. Firstly, they’ll think twice about sending any more money your way. Secondly, they will – when they get the opportunity – withdraw the money that’s already in your country.

Investors have driven up the price of insurance against the country defaulting on its debt (credit default swaps – CDS). Meanwhile, the yield on the ten-year bond is heading for the 20% level. And of course stocks have fallen.

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