First things first, let’s emphasize on basics.
What is hyperinflation?
Inflation means your value of money erodes over time. So hyperinflation would be that your value of money erodes very quickly. An accurate number for hyperinflation is 50% or more. This means if you buy a bottle of water today for 10 rupees then the price of the same bottle will be 15 rupees or more after 1 year. Remember one thing, inflation, and hyperinflation depreciate the value of the home currency.
What is the currency of Turkey?
It is the Turkish Lira. Very few people are aware of this.
Now coming to, what caused hyperinflation?
A straightforward answer would be a shock in supply chains. This means, because of the Russia vs Ukraine war the global supply chains are disturbed creating an imbalance between demand and supply. Because of less supply, the prices are soaring. Taking a hypothetical example, if Turkey was importing crude oil at 1 lira per barrel now they are paying 1.75 Lira per barrel, which, in turn, increases the cost of energy and crude oil suppliers. This cost is then passed on to the consumers which causes hyperinflation.
Now, how are Turkish companies benefitting from this?
Companies whose revenues and cash flows are highly dependent on foreign currencies, such as dollars or euros. These companies will see their domestic operating costs, denominated in Turkish Lira, rapidly depreciating in time relative to their actual earnings, should those be earned from selling goods and services abroad.
To simplify everything, let’s take the example of ABC Ltd which operates in Turkey. ABC Ltd produces goods that are not in demand in Turkey. This means hyperinflation will affect the costs of ABC Ltd. by a negligible percentage, the reason being, the demand for these decreases if the prices increase which brings down the prices again. ABC Ltd. is highly dependent on its exports which means when the Turkish Lira fell by 20% because of hyperinflation, the goods of ABC Ltd. became cheaper for foreign currencies like Dollars or Euros. Before they used to pay 1 Dollar or Euro to import these goods from Turkey and now they are paying 0.80 Dollars or Euros for importing these goods. When global inflation is soaring, these goods get more demand because they got cheaper. This is the main reason why ABC Ltd. is earning more in hyperinflation.
To summarize this example - The cost of raw materials went down, and the Turkish Lira depreciated which made these goods more attractive because they became cheaper, this increased the demand for these goods and in the end, the bottom line of ABC Ltd. increased because of an increase in sales of ABC Ltd due to cheaper exports.
In my opinion - Turkish equities are some of the most overlooked in the world due to many of Erdogan’s policies. For most investors, Turkey is likely not an excellent place to consider investing for the time being, though there are surely some undervalued companies buried beneath the economic chaos. If you are adventurous and risk-seeking, the trick will be to find undervalued companies whose sales are mainly dependent on exports.
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