(Bloomberg) — As the Turkish lira’s losses hit 10% on Wednesday — on track for the sharpest nosedive in four years — Pavel Mamai saw the opportunity he’d been waiting for.
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“We thought this could be what we like to call the ‘pod moment,’” when multi-strategy funds are forced to sell, said Mamai, the co-founder and managing partner of Promeritum Investment Management, a hedge fund focused on emerging markets.
The sudden lira slump triggered by the early-morning detention of popular Istanbul mayor Ekrem Imamoglu on Wednesday meant big foreign funds had to rapidly reduce their exposure. That sent returns on the so-called carry trade in Turkey from one of the highest in emerging markets this year to a loss. In carry trades, investors borrow in currencies where rates are low and invest in high-yielding countries.
As the foreigners sold, Mamai moved in to buy lira assets, correctly wagering that the turbulence would guarantee central bank support and keep interest rates high — factors that had underpinned the more than 5% carry-trade return up until Wednesday.
The crackdown on a potential challenger to President Recep Tayyip Erdogan was a sharp reminder of the country’s political risks. Local banks were forced to sell about $8 billion to stop the worst currency retreat since 2021 and the central bank hoisted its overnight lending rate 200 basis points to 46% at a surprise meeting Thursday.
“The danger for the central bank is not foreign investors,” said Mamai, who manages $650 million from London. “They’ve got more than enough reserves to let all foreign investors out, the danger is with the locals.”
After a pause on Thursday following the rate decision, the lira’s slide resumed, with the currency trading 0.5% weaker at 38 per dollar as of 8:52 a.m. in London. Local two-year bond yields climbed for the fifth day and the main stock gauge plunged 7%.
According to estimates by Bloomberg Economics’ Selva Bahar Baziki, the central bank should “comfortably accommodate” any hot-money outflows. The Turkish Central Bank had more than $50 billion of net reserves at the end of February, about double the amount of funds foreign investors brought in to profit from the carry trade, she said.
“The main risk is a spillover of sentiment from foreign investors to domestic savers,” Bahar Baziki said. If that happens it would put an additional burden on central bank reserves and the cash pile would be sufficient to keep a lid on inflation for up to three months, she said.
