No Interest?
This article is the first in a series of finance articles by Steve Bishop, a retired accountant living in Bodrum.
Other articles in this series:
Part 1: No Interest?
Part 2: To Trade or not to Trade…
Part 3: Choosing Shares
Part 4: Turkish Mutual Funds
Part 5: Interesting Deposits
Part 6: Currency Trading
Part 7: Comparing Investments
No Interest?
Not so long ago, if you had spare cash there was no great dilemma as to what to do with it. With Turkish interest rates often over 20%, you could just put it a fixed interest bank deposit account and go relax by the pool. Nowadays, the financial world has changed beyond all recognition or anyone's expectations. With net Turkish bank interest under 7% and some Turkish banks restricting the amount that can be put into deposit accounts, many of us are having to consider other options for generating income. It seems likely that there may be one more small interest rate cut followed by perhaps six months of no change. Then the Turkish Central Bank will have to raise rates again as the rest of the world raise their rates. However, there is no expectation that Turkish rates will ever return to the levels we enjoyed a few years back.
Of course, back in the UK, the situation is even worse with almost zero interest rates on many bank savings accounts. Even the popular e-savings and ISA accounts are offering under 0.5% nowadays. The only way to get better (but still miserly) rates in the UK is to lock up your money for one to six years, but even then rates rarely top 4% before tax. Even if you are a non-taxpayer in the UK, your income will still be lower than that from Turkish deposit accounts after 15% withholding tax.
In this and future articles, we'll have a look at some of the options available to those of us living here on the Bodrum peninsular. If you speak fluent Turkish and have finance expertise then you could consider buying shares directly on the Turkish stock market but in these articles we'll only consider options suitable to the average ex-pat. Unfortunately most banks in Turkey are not good at providing detailed information in English on investment products. Apologies for readers whose home country is not the UK, but many of the principles we look at will apply to you too.
We will consider on-line trading in UK shares, Commodities (like Gold), Turkish Government Bonds, Turkish Treasuries/Gilts, Turkish Mutual Funds (similar to UK Unit Trusts) and Forex (Foreign Exchange) trading as potential additions to your deposit accounts strategy. These articles will look at the advantages and disadvantages of these options but will not recommend specific companies, shares, banks or other financial institutions.
As with all areas of life, not every option will be suitable for everyone and you should always get more information before making any investment decisions. Your own personal circumstances, financial situation, tax and residency status must be very carefully considered.
Perhaps the greatest decision we have to make is whether to hold funds in Turkish lira (TRY) or our home currency (GBP or EUR). This has become even more of an issue now that interest rates have dropped as a currency exchange rate movement can wipe out all your gains overnight. The Turkish Lira is more stable nowadays averaging 2.58 (GBP/TRY inter-bank rates) over the last 6 years but it has been as high as 3.1 and as low as 2.15. Over the last two years, it has mainly stayed within the 2.3 to 2.55 range (averaging 2.42) i.e a 10% variation. The last few months we have been in top half of that range, making it potentially a good opportunity to convert to TRY.
However, timing is everything so if you are intending to change a larger sum, it is well worth watching and waiting to get the best rates. For example, changing £10,000 at the beginning of October would have given you around 23,000 lira. The same transaction at the beginning of December would have given you 25,000. That is an 8.6% difference i.e more than a whole years interest on that sum !
If you spend most of your income in Turkey and have no foreseeable plans to return permanently to the UK, then holding your funds in TRY is not such an issue but otherwise, if your funds are currently in the UK, should you convert them to TRY ? Generally to take advantage of Turkish rates or financial products, your funds need to be in TRY. If you do convert, be aware that most banks offer exchange rates with spreads (the difference between what they buy and sell a currency) as high as 5-6%. This cost needs to be added to any future currency exchange rate movement. There are companies offering much better spreads for converting GBP to TRY, as low as 1%, which gives considerable savings on converting larger sums. Unfortunately, it seems very few are interested in changing TRY back to GBP/EUR.
"Forecasting is difficult, especially about the future". Chinese proverb
Almost all forms of investment carry some sort of risk, even if it is only the risk of earning less that we could have done. In today's global economy there are so many variables but we can at least manage those over which we do have some control. Before making an investment, the major question you must ask yourself is "How likely am I to need this money in the near future ?". If you have flexibility as to the timing of selling an investment and/or converting it back to another currency, then you are far less likely to get seriously affected by inevitable market and exchange rate fluctuations. Risk can also be reduced by not having all your eggs in one basket. This means not only having multiple types of investment but also different maturity dates (the date at which you can pull out of the investment without penalty).
For those who want to keep some GBP funds, in the next article we will look at on-line share trading in UK shares. With broadband access to the internet, this has become an easy option for anyone with basic computer skills, is simple to get started and can even be done with no money !
Steve Bishop (retired accountant)
stevebrcs@yahoo.co.uk