The greatest game of all

Photo by  Osman Köycü  on  Unsplash

This week we’ve been visiting friends in Turkey, a country with a fascinating history and an exciting future – one way or the other.

When Sultan Mehmet II led the marauding Ottoman army towards the walls of Constantinople in 1453, legend has it that the local residents shouted after them to ask where they were going. The response to the local Greeks was “εἰς τὴν Πόλιν”: “is tim ‘bolin”, or “to the city”, whence Istanbul derives its name.

Nearly 566 years later – if you believe today’s leader, Recep Tayyip Erdoğan – the country is once again under siege. With local elections coming up this weekend, most Turks are expecting the fiercest challenge to Erdoğan’s AKP Party since he first came to power as Prime Minister, nearly 16 years ago. Towering images of Erdoğan pepper the streets of the city like never before, as he paternalistically looks out upon an ever changing metropolis urging people to vote for his party. Yet Istanbul, Ankara and even the industrial hub of Bursa, traditionally an AKP stronghold, are potentially under threat of falling to the opposition CHP.    

Erdogan on every billboard…

Erdogan on every billboard…

An inverted curve

On Friday last week, the Turkish Lira fell over 5% against the US Dollar, prompting Erdoğan to angrily confront foreign bankers (in this case JP Morgan)  for encouraging a speculative run on the currency. With the nation’s dwindling FX reserves now down to under US$20bn, market participants and businesspeople have looked on in astonishment as the central bank has yet again resorted to unorthodox measures to defend the currency. By urging local banks not to lend Lira to foreigners, in addition to the Lira lending cap of 25% of equity imposed on banks last year, the CBT has effectively stopped supply of Lira into the offshore market. The result? Overnight Lira funding rates rocketed to as much as 1400% (yes that is nearly 4% a day!) squeezing short sellers and coercing them to close their positions. The unintended consequence was that investors panic-sold local equities and bonds to raise the lira they couldn't source directly.


This yield curve inversion makes the Fed curve inversion look mild. In reality, however, it amounts to no more than a game of chicken. The narrative locally is that with elections in a couple of days the government cannot afford further economic damage in the eyes of voters and is mounting a furious last stand to prevent major losses in the polls. Who knows how this will end? Local retail demand for dollars has risen dramatically and one gets the sense that the game may soon be up. The chances are high it will not end well. 

Downtown Istanbul, seemingly unaffected by the week’s economic turmoil.

Downtown Istanbul, seemingly unaffected by the week’s economic turmoil.

A major transformative event

One cannot shake the feeling that Turkey could be on the verge of a major transformative event as a multi-decade political cycle comes to a head. Any change would no doubt be tumultuous and result in major short term pain. However, Turkey is a vibrant place with geography and demographics in its favour. With the right policy mix it could fast become one of the biggest investment opportunities of our generation.

Confidence is low as Turkey continues to work its way through a recession and businesses struggle to manage daily challenges. Although in fairness, sitting at glitzy Lucca in the neighbourhood of Bebek, watching the bustling traffic and beautiful people go by on the western shore of the Bosphorous, one could be forgiven for thinking this was just another gorgeous spring week with blue skies and “Eşek” sun.

Eşek means donkey – as a traditional Turkish folk story goes, the weather we had these past few days (warm in the sun, cold in the shade) was a “donkey killer”, as faced with the gentle warmth of the sun, a donkey falls asleep with half its body in the shade. When the donkey wakes up, it finds that the part of its body lying in the shade has frozen up in the cold, and attempting to get up, it splits into two and dies. Turkish humour at its best.

The status quo in this blessed land is one of chaos and uncertainty and though people complain, it is with a shrug and a smile. They are used to it. This resilience has birthed an exceptional breed of entrepreneurs and business people who are creative, resourceful and full of grit. 

The beautiful  Bosphorus .

The beautiful Bosphorus.

A multipolar world

Turkey is a low-cost manufacturing hub and a fast rising science and technology centre. Despite the AKP’s difficulties in recent years it has succeeded in building one of the world’s fastest rising defence industries. 2023 is the 100th anniversary of the founding of the republic and the target of reaching 70% self-sufficiency in the defence supply chain is well on track, with a new breed of businesses innovating and replacing imported capabilities. 

This all helps with Turkey’s chronic current account deficit, which has fallen sharply (albeit mainly due to a collapse of domestic demand since the onset of recession last year). Companies like state–owned Aselsan and its local supplier Karel have grown in recent years as result of rising earnings power aided and abetted by the extremely favourable government policies above. Aselsan has in recent months lost its lustre somewhat, finding itself plagued with working capital problems in line with the government’s own struggles – but this theme is still very much on track with the right stock selection. 

In a multipolar world where our fourth investment super theme, The Great Game, is forcing countries to fend for themselves, Turkey is one of the few that may just be able to achieve self-sufficiency in defence. In a hostile neighbourhood with Syria, Iran and Iraq to its South and the Russians back in charge in Crimea just across the Black Sea, Turkey needs to be on its toes in terms of military capabilities.  

Our Great Game theme extends further here. As the economy continues to suffer and leverage in the system proves crippling, the Chinese sniff blood and sense an opportunity. There can be no greater strategic geopolitical landmass on earth than Turkey and recently there have been rising rumours of a potential Chinese deal with loans and investment on the horizon. We have just witnessed Italy’s deal to join One Belt One Road, becoming the first G7 country to do so. It would be hardly surprising should Turkey be next and would herald a dramatic victory for President Erdoğan snatching economic redemption from the jaws of a looming crisis.  While this would be a certain and substantial short to medium term boost, it would only paper over the divided state in which the country finds itself. 

As The Great Game plays on, opportunities present themselves with impeccable timing.

As The Great Game plays on, opportunities present themselves with impeccable timing.

A new status quo

Turkey has always been where East meets West, where Asia meets Europe, where the old world and the new world seamlessly interact with each other. This is evident in the transformation of the economy too. 

Amazon has now begun to make inroads but Alibaba is not far behind. The fintech ecosystem here is nowhere near as advanced as in Asia, but when it takes root it would be unwise to presume its onset would be any slower than what we’ve seen in China, India and Indonesia. Online delivery is blooming, Netflix is growing and our “Competition for time” investment theme is evident here, as Turks face ever-growing options for entertainment and recreation. Furthermore, evidence of “Finance 2.0” is very much on show, with Turkey being one of the world’s most pre-eminent bitcoin-buying nations as the Lira becomes ever more volatile.

To lead the country into its centenary in 2023 is a burning ambition of President Erdoğan as he looks to emulate the revered founder of the republic, Mustafa Kemal Atatürk. As we jet out on the national carrier, Turkish Airlines, which flies to more destinations that any other airline (a reminder of the country’s fortunate geographical location) we cannot help but feel that when we next return it will be to another, different status quo. Whether a deal with the Dragon or even a late IMF involvement, whether a political shift or a subtle nudge, we really don’t know. What we do know is that there is uncertainty and this implies non-linear opportunities which we love to explore at Three Body Capital.

We thank our friends and partners, old and new, for hosting us yet again with grace and enthusiasm for our business and our ideas. We look forward to many more trips to this great country in the times ahead.

Our CEO, David Cunio, and our Turkish partner, Tunç Çakan enjoying a joke and some Turkish sun.

Our CEO, David Cunio, and our Turkish partner, Tunç Çakan enjoying a joke and some Turkish sun.