Is the influx of foreign capital into Turkish assets overdone? Bank of New York Mellon (BNY) reportedly thinks that may be the case. Investors, it says, are likely ignoring pitfalls that could spark a reversal. 

Wagering that the Turkish lira (TRY) will appreciate amid Turkey’s return to economic “orthodoxy”, overseas investors have shifted billions of dollars into Turkish assets this year. However, Bloomberg on July 30, reported Bob Savage, BNY’s head of markets and strategy, as saying in an interview that sky-high borrowing costs and geopolitical tensions amount to substantial threats to what is a crowded currency trade.

“Turkey is at the crossroads of a mess,” Savage was cited as saying in an interview in Hong Kong. “You could see the Iranian-Israeli conflict getting worse. You could see the Russia-Ukraine conflict getting worse. And Iran being part of that story and Turkey being caught in the middle.”

Turkey’s central bank last week stuck to its benchmark interest rate of 50% for a fourth straight month.

“I’m not sure that it can sustain 50% interest rates,” Savage was also reported as saying, adding: “People are long bonds, they’re long equities and they’re long the currency. It’s a trifecta.”

Bank of America strategists reckong positioning in Turkish lira forwards could now exceed $20bn.

State-run banks have helped to steady the depreciation of the lira to below monthly inflation, enabling the currency to appreciate by in excess of 11% in real terms this year, Bloomberg noted.

Savage told the news agency a reversal could be seen in the fourth quarter or early next year. Inflows, he said, could rotate to “counterweight” frontier economies like Egypt, Nigeria and Argentina. 

“People are happy with the policies [of Turkey] and it is on the right path, but I’m not sure that it deserves all the money,” Savage was also quoted as saying, concluding: “Recognising that there are problems that will make it unwind. That’s real.”