Cautiously optimistic on the Turkish lira

We are cautiously optimistic on the Turkish lira and have recently moved the currency to an overweight in our Emerging Market portfolio. Our new call is supported by the central bank’s more orthodox stance and the authorities’ preference for real appreciation of the lira.

• The Turkish central bank (CBRT) has taken significant steps to bring its policy course into line with the rest of the world following a shift to an orthodox approach last year. The 4150bps in policy rate hikes since mid-2023 has left the policy rate at 50%, which should be sufficient to bring inflation down from near 70% currently.
• We acknowledge high risks to our call given Turkey’s weak external position. The backdrop of low reserves may challenge the goal of real lira appreciation. Furthermore, it’s possible Turkey will reverse course on policy.
• We estimate average returns to be high and see risks as positively skewed. The minimum return we would accept given the level of risk is 12.5%; our modelling suggests annualised return exceeds the minimum threshold in 70% of plausible scenarios.