Emerging Sovereign Group LLC, the $5 billion hedge-fund firm majority-owned by Carlyle Group LP, is betting attempts by Turkey’s central bank will be too little, too late to stem a currency slide.
The firm listed wagers against the lira and on higher Turkish interest rates among its “favorite positions” in a Jan. 31 letter to investors, a copy of which was obtained by Bloomberg News. Central bank Governor Erdem Basci was forced to raise rates in January after its first unscheduled interventions in the currency market for more than two years failed to halt the lira’s slide.
“Turkey had all the ingredients for a textbook balance of payments crisis, and it is quickly playing out as we had expected,” New York-based ESG wrote in the letter. “We do not believe that the central bank finally succumbing to market pressure and adopting a more orthodox monetary policy will be enough to stem the pressure on the currency.”
The lira has fallen about 9 percent against the euro since Dec. 16, the day before a graft probe that ensnared cabinet ministers and the head of a state-run bank became public. Protests broke out last month after the release of two audio tapes purportedly of Prime Minister Recep Tayyip Erdogan discussing bribes.
Turkey’s minister of finance and economy ministry declined to comment when contacted by phone.
ESG, founded in 2002 by Kevin Kenny to focus on emerging markets, was seeded by Julian Robertson’s Tiger Management LLC. Carlyle agreed to buy a 55 percent stake in the company in June 2011. Its main fund rose 12 percent in 2013 and has posted a 7.2 percent annualized return since the start of 2005, according to the letter, which showed a 0.4 percent decline in January.
ESG is wagering that a crisis in developing markets will intensify as investors withdraw money from assets focused on the regions, the firm said in the letter. Slowing growth in China, the U.S. Federal Reserve’s reduction of stimulus and geopolitical turmoil fueled by violent protests in Ukraine have weighed on investor sentiment.
The emerging-market sell off wasn’t caused by “one-off, idiosyncratic events,” ESG said in the letter. “They are signals of building stress in a hugely leveraged global economy, where growth is slowing and liquidity decreasing -- a perfect recipe for a vicious spiral of lower asset prices and still weaker growth.”
An emerging-markets crisis could be the catalyst to trigger renewed recession and deflation in Europe, ESG said in the letter. Other positions the firm listed among favorites include trades against the Hungarian forint, Russian ruble, South African rand and Canadian dollar and a wager on a rising British pound.
While the firm sees continued pressure on Turkey, it’s betting on shares of Turkiye Garanti Bankasi AS (GARAN), the retail and commercial lender based in Istanbul, saying a drop of 47 percent from May’s peak makes valuations attractive.
Kenny, who formerly led emerging-markets bond trading at Morgan Stanley, is ESG’s chief investment officer, Mete Tuncel is macro portfolio manager and Jason Kirschner is equity portfolio manager.
Randall Whitestone, a spokesman for Carlyle, declined to comment on the letter.
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