Turkish lira offers highest return among emerging markets

The Turkish lira is on a roll. It’s the cheapest currency among emerging markets. But it also offers some of the highest returns, with foreign funds vying to get hold of it.

It's a big turnaround from the situation just months ago, when terrorist attacks and a failed coup in July 2016 battered the country's economy and investor confidence. 

“Global investors can get 11 percent to 12 percent return on Turkish T-bills,” said Timothy Ash, a senior emerging market analyst at BlueBay Asset Management, a multibillion dollar fund with investments in Turkey. 

“[Lira] on effective basis is the cheapest since 2003, so the currency doesn’t look expensive. At the same time, you are getting very good yield in terms of interest rates on local bonds,” Ash told TRT World. 

Since falling to around 4 liras to the US dollar earlier this year, the Turkish currency has recovered much of that lost ground. 

Last week, it crossed the key psychological barrier of 3.5 to the dollar on strong economic numbers.

 Its potential for further gains backed by the strong economic performance makes it one of the most undervalued currencies, according to Ash. 

“I think 11 to 12 billion dollars of foreign portfolio investment will come to Turkey in the next six months,” he said.

The lira has gained 1.2 percent this year after a 17 percent slide in 2016, according to Bloomberg. 

What makes the lira attractive for investors is that it remains the worst-performing among major currencies, but is benefitting from government steps to boost the economy in the wake of the previous year's downturn.

Ankara lowered taxes on electronic appliances, furniture and real estate in an effort to boost consumer spending, and banks were encouraged to lend.

The result was a resurgent economy with GDP growth of 5 percent in first three months of 2017 – a marked improvement from just a few months ago when the economy shrank.

Turkey’s central bank has pursued a tight monetary policy, keeping average lending rates at around 12 percent, something that has added to the lira’s strength, Ash said.

“What this suggests is that the government has recognised that currency stability is good for overall confidence. If the currency is weakening then people feel uncertain, and if the currency is stronger Turks generally spend more,” he said.

But the lira still faces the challenge of attracting wary local investors. Turks are thought to be sitting on some $165 billion in foreign currency in domestic deposits.

“Local investors are cautious. They're worried about the political situation and have been buying foreign currency and selling lira in the last six months,” Ash said.

“A lot depends on the Turkish people. If they continue to buy dollars then the lira will weaken.”