Phoenix Kalen, strategist, Societe Generale
We believe that current valuations in the Turkish lira, alongside high currency carry and still-favourable external market conditions, argue in favour of owning some limited long exposure to the lira. The Turkish lira is currently about 20 percent undervalued relative to its 10-year average in real effective exchange rates, while the forward curve is pricing in roughly 10 percent depreciation in the lira against US dollar over the next 12 months. Although geopolitical and domestic risks abound in the Turkey narrative, we believe that most risks are known by market participants and that over the near term, the currency carry offers sufficient compensation against the various concerns. These are: Turkey’s growing involvement in Syria and the potential for deeper conflict with the US or Russia or diplomatic stalemate between Turkey and the EU; Turkey’s purchase of
S-400 antimissile systems from Russia, detention of consular employees, etc.; and high inflation expectations and a weak inflation-targeting framework from the Central Bank and commodity prices.