Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Hedge funds and other traders have pumped billions of dollars into the Turkish lira in recent months as they chase juicy returns, but the rush of “fast money” has also left the country more vulnerable to sudden swings in sentiment, say investors and analysts.
Money managers have since October poured around $24bn into trades that seek to profit from Turkey’s high interest rates — currently 50 per cent — according to Istanbul-based Bürümcekçi Research and Consultancy.
Managers borrow the money for the trade in a currency with lower interest rates to maximise their gains, while hoping that the exchange rate does not move against them in the meantime.
The race into the lira is the latest sign of how Turkey’s pivot towards conventional economic policies, which began last summer, is helping draw back international fund managers who had fled the market in recent years as unorthodox measures fuelled runaway inflation.
“The lira . . . has been a very popular trade,” said Grant Webster, co-head of emerging market sovereign and foreign exchange at investment manager Ninety One.
“Turkey has seen meaningful foreign inflows” as a result of high interest rates and a shift away from unorthodox economic policies, he added.
Investors are running the biggest position in the Turkish lira above the benchmark index weighting in about five years, according to a June survey of JPMorgan clients.
A significant portion of the influx has been in the form of “fast money” flows — investors such as hedge funds who can rapidly exit in the event of international or domestic shocks, analysts and investors say.
“The share of fast money in trades like this has been increasing and that definitely does make them more prone to reversals,” said Kieran Curtis, head of emerging market local currency debt at fund manager Abrdn.
A Turkish economic official, who asked not to be named, echoed that sentiment, noting that one downside of being back in vogue was that an external crisis such as a surge in oil prices could send fickle investors stampeding out of the country’s markets.
The inflows have come after President Recep Tayyip Erdoğan, who once called high interest rates the “mother and father of all evil”, abandoned his insistence on keeping borrowing costs at ultra-low levels following his re-election in May 2023.
Turkey’s central bank has raised its main interest rate to 50 per cent from 8.5 per cent since last June as part of a broad economic overhaul.
Moody’s Investors Service on Friday awarded Turkey a rare two-notch upgrade to its junk-level credit rating to B1, citing the “increasingly well-established return to orthodox monetary policy”.
The head of a large emerging markets hedge fund that has allocated a substantial amount to carry trades added that he “liked Turkey” right now. “[Erdoğan] recognises inflation has to be controlled,” he said, adding that “Turkish savers fled to dollars but now they are coming back.”
Another hedge fund manager running a carry trade in the lira said he was less worried about foreign investors exiting the market and more focused on the risk of local savers losing confidence in the currency and moving their savings back into dollars and euros.
The lira has generated total returns, including gains from interest payments, of 18 per cent against the US dollar in 2024 despite a significant depreciation in the Turkish currency, Bloomberg data shows. Few other emerging market currencies have offered such strong total returns.
In addition to betting on the currency, foreign investors have scooped up around $12.5bn in lira denominated-government bonds since the economic volte-face last June. Foreign investors now hold 6.7 per cent of the country’s domestic debt stock, compared with 0.6 per cent before May’s election, finance ministry data shows.
The international inflows have been a major boon for the central bank’s effort to rebuild its foreign currency war chest, which was severely depleted in recent years by an unsuccessful attempt to prop up the lira and by high imports caused by intense demand for consumer goods.
Net foreign assets, a proxy for foreign exchange reserves, have jumped to $40bn from around minus $20bn last summer, according to Financial Times calculations based on central bank data.
Net assets strip out some liabilities of the central bank, but do not account for short-term borrowing from the local banking sector through swaps.
These higher reserves, and the central bank’s commitment to keeping monetary policy tight, will help Turkey fend off any future run on the currency, according to Webster, who said the central bank is now in a “very strong position to defend against outflows”.
Nevertheless, many conservative investors, such as pension funds, remain too nervous to make large allocations to Turkey, on concerns Erdoğan will change course on policy, as he has done many times in the past when it has been politically expedient.
Large-scale foreign direct investment in projects such as factories has also remained elusive.
“[Finance minister Mehmet] Şimşek is likely to deliver the more predictable Turkey that FDI needs — but he’ll only get rewarded for it in a few years,” said Charlie Robertson, head of macro strategy at emerging markets specialist FIM Partners.
