Turkey’s currency crisis ‘has further to go,’ investment chief warns

KEY POINTS

• Turkey’s embattled lira is on its third day of recovery from a record low, but that doesn’t mean its epic fall is over, market experts warn.
• With no sign of de-escalation in its tariff spat with the U.S. and the absence of a comprehensive plan to address key economic weaknesses, Turkey risk remains extremely high.
• The lira was trading at 5.7900 to the dollar at 10:30 a.m. Thursday Istanbul time (5:30 a.m. ET), extending a three-day rallying from its record low of 7.24 on Monday.

Turkey's embattled lira continued its recovery from record lows Thursday, but this doesn't mean its epic fall is over, market experts warn.

With no sign of de-escalation in its tariff spat with the U.S. and the absence of a comprehensive plan to address key economic weaknesses, longer term relief for Turkey is unlikely and risks remain extremely high, according to onlookers.

"I think you're going to see some very quick and quite sharp recoveries, but the trend is not very good, and I suspect this crisis has further to go — because they've done nothing fundamentally to change it," Jim McCaughan, the chief executive at London-based Principal Global Investors, told CNBC's "Squawk Box Europe" Thursday.

"It could be tightening by the central bank, which would slow the economy but might steady up the currency, it could be meaningful moves to reduce either the trade deficit or fiscal deficit, both are possible," McCaughan suggested, pointing to the more fundamental policy changes necessary to stabilize the lira

The currency was trading at 5.7900 to the dollar at 10:30 a.m. Thursday Istanbul time (5:30 a.m. ET), rallying from its record low of 7.24 on Monday.

The currency plummeted 20 percent against the greenback in a single trading day last Friday after President Donald Trump announced a doubling of steel and aluminum tariffs on Ankara, in return for the country's continued detention of American pastor Andrew Brunson. Brunson has been held in Turkey since 2016 on charges of espionage and coup plotting, allegations he denies.

So far, the lira has lost more than 40 percent of its value against the dollar this year, sparking fears of contagion and a sell-off in emerging markets.

Investors have long been calling for policy signals that would revive confidence in the country. Turkish President Recep Erdogan has been criticized for not allowing the central bank adequate independence to raise interest rates despite an overheating economy and inflation now exceeding 15 percent — far above the central bank's target of 5 percent.

The lira's weakness spells catastrophe for Turkey's debt repayments, made all the more painful thanks to its heavy reliance on external funding. Turkey's foreign currency-denominated debt equals about 50 percent of the country's gross domestic product.

Qatari rescue a temporary fix?

On Wednesday, the tiny oil-rich Gulf state of Qatar announced a $15 billion investment package for Turkey as part of a rescue measure, expected to go toward banks and financial markets. But this is merely a band-aid, McCaughan said.

"With the twin deficit, Turkey has a big external funding requirement. And honestly $15 billion in funding from Qatar is nice, it buys them some time, but it doesn't do much more than that — not enough to fundamentally change the trajectory … I don't think this one is over."

Turkish Finance Minister Berat Albayrak is scheduled to give a conference call to more than 1,000 investors Thursday which many hope will calm markets. The week's turmoil has jolted assets globally, pulling down equities across developed market indexes and hitting the MSCI emerging markets index particularly hard.

Meanwhile, Erdogan has chosen an aggressive tack, hitting back at the U.S. with increased tariffs on several U.S. goods and framing Turkey as the target of "economic warfare" — behavior that has further worried investors.

Goldman Sachs backed up McCaughan's outlook for the lira in a research note Thursday, writing that "the value created in the TRY (the lira) would not be enough to stop the sell-off in Turkish assets, and in the absence of more concrete policy steps the near term risks are skewed towards even further depreciation."

Still, some daring investors see value opportunities amid the sell-off.

Boutique asset management firm RAM Active Investments, based in Geneva, remains "overweight" on Turkish assets. Its senior equity fund manager, Emmanuel Hauptmann, told CNBC in a prior interview that export-driven Turkish firms with U.S. dollar revenue remain good buys, particularly in the consumer discretionary and industrial sectors.

"Risk in Turkish equities will obviously remain very high in the coming months," he said, admitting that his fund's position is now in the minority. "But current extremely low valuation levels do create selective value opportunities."