Lira Bull Who Called 2019 Rebound Says It’s Rally Time Again

(Bloomberg) -- A money manager who rightly called a 15% rebound in the Turkish lira last year is again turning bullish on the turbulent currency.

Thomas Clarke, who helps manage $56 billion at William Blair International in London, said he’s built a long position in the lira on the grounds that the nation’s central bank has become more willing to tighten monetary policy.

There are signs he’s not alone in his optimism: while geopolitical jitters prompted outflows in the week through Oct. 8, foreigners were investing in Turkish stocks and bonds at the fastest pace in almost three years in the prior period.

“We think the lira is quite deeply undervalued,” Clarke said in an email. “It has been undermined by fears that the central bank under political influence will not adequately tighten monetary policy to contain high inflation.”

Growing geopolitical risks and negative real yields amid double-digit inflation have ratcheted up pressure on the lira, pushing it to yet another record low last week. The currency has fallen 25% this year, the eighth successive annual decline and the worst performance in emerging markets after the Brazilian real.

Though Clarke doesn’t expect another hike when the central bank meets on Thursday, he says policy makers won’t be returning to their ultra-dovish stance. The median forecast in a survey of nine economists by Bloomberg is for a 150 basis point interest-rate increase to 11.75%.

“I understand this is not a consensus trade,” he said. But “the risks at this point are balanced by the already very weak level of the lira.”

Goldman Sachs Group Inc. is predicting rates will be hiked to 13.25%, but warned there’s a risk “tightening is delayed, resulting in more lira volatility.” Goldman economists lowered their forecasts for the currency, predicting it would weaken to 8.50 per dollar in three months’ time. The lira was trading 0.3% stronger at 7.8976 as of 13:49 p.m. in Istanbul.

The lira’s so-called real effective exchange rate, which adjusts for different inflation rates across a basket of Turkey’s major trading partners, is also at a record low. The gauge is a popular metric of a currency’s competitiveness as it strips out the effect that rising prices have on exports.

In May 2019, Clarke made a similar tactical bullish call on the lira, again betting on a relatively hawkish stance from policymakers. Over the next three months, the lira appreciated from about 6.25 per dollar to around 5.45.

©2020 Bloomberg L.P.