Carry opportunity for lira
Arguably the most intriguing candidate for promotion to the ranks of ‘good carry’ in emerging markets is the Turkish lira, especially given its higher exposure to US rates and the prospect of easy (or even easier) US financial conditions over the next quarter. Even with the recent appreciation, the Turkish lira remains the most undervalued EM currency ... (fair value for $/TL is at around 2.50 level rather than the 3.50 level it currently trades at), but the missing ingredient has always been the unwillingness of the central bank to move real rates sustainably higher. The hawkish surprise from the central bank at its April meeting, where the late liquidity rate was hiked to 12.25% and tight liquidity maintained despite the absence of market pressure was a first for an otherwise reflexively dovish institution. If this hawkish tilt is maintained by the central bank it would be easier to get comfortable with the notion that there has been a genuine shift in the policy reaction function. In this case the combination of tight monetary and easy fiscal policy, coupled with the rather supportive valuation picture, means that there should be space for considerable further outperformance, especially if inflation starts to stabilize from very high levels.