The Turkish lira stands out as the top pick among currencies in Eastern Europe, the Middle East, and Africa, according to Bank of America Corp. strategists. They project nearly 10% returns through a carry trade strategy, which involves borrowing in U.S. dollars and investing in lira.
Market Confidence and Strategy
This strategy has gained traction as investors grow confident in Turkey’s efforts to curb inflation and revert to more traditional economic policies. Bank of America strategists, including Mikhail Liluashvili, recommend buying lira forwards, anticipating that higher summer tourism revenues will strengthen Turkey’s financial position.
“We are long TRY due to high carry, positive current account seasonality, and tight monetary conditions,” they noted in their report. The carry trade on Turkish assets, previously abandoned due to unorthodox measures, has seen a resurgence following significant rate hikes and a shift towards conventional economic policies. Over the past six months, the lira has delivered a 13% gain, making it the best-performing carry trade in emerging markets, according to Bloomberg data.
Potential Risks and Alternatives
Despite the lira’s strong performance, the Bank of America strategists caution about the risks of market crowding, which could become problematic if unexpected market shocks occur. For some investors, Turkish government bonds might present a more appealing option.
In a separate analysis, Citigroup Inc. strategists predict a “renaissance moment” for Turkish assets. Analysts, including Luis Costa, emphasize that the lira and Turkish bonds’ performance will heavily depend on the central bank’s success in managing inflation expectations.
Current Market Metrics
- USD/TRY: Steady at 32.2082 as of 10:51 a.m. in Istanbul
- 5-year CDS: Stable at 264 bps
- Borsa Istanbul 100 Index: Up 0.3% to 10,931 points
- U.S. Treasury 10-year bond yield: Unchanged at 4.43%
- Brent crude: Steady at $81.86 per barrel
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