While macroeconomic forces are favorable for the Turkish lira, we recently reduced our long exposure as geopolitical risks rise.

Monetary Policy Delivers Tailwinds

The Turkish lira is currently one of the two largest long exposures in our currency strategy (along with the Philippine peso). The lira remains very undervalued, but we have concern that geopolitical risks may threaten it going forward.

Turkey experienced sharply rising inflation in 2018 to a peak of 25%. The Turkish central bank belatedly responded to this by sharply increasing its policy interest rate. From the peak late last year, Turkey’s inflation rate has fallen back to just under 20%, and so far the central bank has kept the policy rate high.

The lira remains very undervalued, but we have concern that geopolitical risks may threaten it going forward.

When central banks don’t immediately cut policy rates in response to inflation, then real interest rates rise. That’s exactly what has happened in recent months, and it’s been good for our long lira exposure.

Geopolitical Risks Deliver Headwinds

Despite this tailwind, we recently reduced our long Turkish lira position because geopolitical risks against Turkey are rising.

Turkey has signed a deal to buy military equipment, including very advanced anti-aircraft missile systems, from Russia. Payments have already commenced, and delivery might begin in a few months.

That’s problematic for the United States because Turkey is a member of the North Atlantic Treaty Organization (NATO). By buying a Russian defense system and potentially using it in conjunction with NATO defense apparatus in Turkey, Turkey compromises the security of NATO and, thus, the United States. NATO and the United States are therefore opposed to the deal, and the United States has begun sanctioning Turkey because of it.

We think this may become a larger issue in Turkish-U.S. relations. Turkish President Recep Tayyip Erdoğan insists that Turkey won’t back down from its plans. And we don’t think the United States will back down in its opposition to those plans. U.S. President Donald Trump has not intervened directly in this issue to date but may do so. The U.S. doesn’t have much to lose from escalating disagreement. So while Trump-Erdoğan relations had improved since a year ago, that might not last.

Similar tensions occurred in 2018, and that period coincided with the significant midyear decline in the lira. Although we don’t think geopolitics were the primary cause of that decline, geopolitics did coincide with it, so markets are likely to link the two things while seeing the situation as adverse for Turkey without much impact on other countries’ markets.

So, while the inflation and monetary policy are favorable for our lira position (unlike during the summer of 2018), there is now a growing chance that geopolitical risks will rise in a repeat of last summer, with a Trump versus Erdoğan confrontation on the defense issue.

Our Positioning

With the lira strongly benefiting from the monetary environment in recent months, we recently reduced our exposure. We’re still long, but given these geopolitical risks, our position is now reduced. We will watch the situation, and consider increasing our position at more attractive levels if this geopolitical issue creates a bigger opportunity.

Thomas Clarke, partner, is a portfolio manager on William Blair’s Dynamic Allocation Strategies team.

RELATED POSTS

SUBSCRIBE NOW

Gain insights on macro market events, the economy, and investing strategies.
Receive our latest blog posts in your Inbox with headlines like:

SIGN UP

FOLLOW US

twitterfooterlinkedinfooteryoutubefooterfacebookfooter

RSS FEED

Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

The William Blair Funds are available to U.S. residents only. Non-U.S. residents, please click here.

Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
Cookie Policy | Social Media Disclaimer | Privacy & Security | FINRA’s BrokerCheck

FOLLOW US

twitterfooterlinkedinfooteryoutubefooterfacebookfooter

RSS FEED

Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

The William Blair Funds are available to U.S. residents only. Non-U.S. residents, please click here.

Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
Cookie Policy | Social Media Disclaimer | Privacy & Security | FINRA’s BrokerCheck

Subscribe Now

Gain insights on macro market events, the economy, and investing strategies. Receive our latest blog posts in your Inbox with headlines like:

SIGN UP

Send this to friend