Wealth Insights Q3 2025 Outlook: Views From Kuveyt Turk Portföy on The Carry Trade (Dr. Bayram Veli Salur)
1) What are the main ways a client can get exposure to the high TRY rate structure?
Turkey currently offers a positive real rate environment, which is a notable shift compared to previous years. Today, the policy rate is above both ex-post and ex-ante inflation expectations, making Turkish lira-denominated instruments increasingly attractive for investors.
Inflation vs Policy Rate
As shown, following March 2024, the policy rate has been significantly above ex-ante inflation expectations. This created favorable conditions for carry trade strategies, particularly as the currency remained stable. Since the summer of 2024, the policy rate has also been consistently above ex-post inflation.
Clients can gain exposure to this high-rate structure by investing in TRY-denominated assets such as money market funds, sukuk funds, or Sharia-compliant participation accounts. Alternatively, they can consider direct investments in TRY sukuk products.
For international investors, accessing these instruments through professionally managed, Sharia-compliant funds provide both operational convenience and tax advantages as theres currently no with holding tax for non-residents investing in these funds.
2) Has this been profitable historically from a USD base?
Yes, this strategy has been historically profitable from a USD base especially since March 2024, when the Central
Bank of Turkey raised the policy rate to 50%, initiating a period of currency stability. Even if we include the first three volatile months of 2024, the overall structure delivered a 28% USD-based return over a 12-month horizon.
The year 2025 started off strongly. However, currency volatility in March weighed on returns, leading some clients to unwind their positions and shift back into USD-based investments. We also observed some capital outflows from foreign investors, which contributed to a decline in central bank reserves. In response, the central bank raised rates again and reasserted its commitment to a strong positive real rate environment. This helped restore confidence and slowed dollarization. Since then, we've seen the currency stabilize again, and the carry trade has resumed working effectively since March.
3) How to deal with the sharp selloffs in TRY?
We do not expect a sharp sell-off in the Turkish lira under the current strong positive real rate environment. Large moves in the exchange rate would trigger a significant pass-through to inflation, which the central bank is clearly aiming to avoid.
Moreover, the current investor base is more balanced compared to previous years. Foreign investor participation in Turkish lira assets remains relatively limited, which in turn reduces the risk of sudden, large-scale capital outflows during periods of volatility.
In the event of market stress, the central bank has both the policy tools and reserves capacity to respond effectively. Given its recent track record and policy stance, we believe any potential volatility would likely be short-lived and actively managed.
4) Walk us through the basic mathematics today - what can you earn versus what currency depreciation would you expect over a quarter / year?
Let's break down the numbers. In 2024, TRY-denominated money market funds delivered an average return of around 53%, while the Turkish lira depreciated by approximately 19.7% against the US dollar. This resulted in a net USD-based return of about 28%, which is quite strong.
In the first four months of 2025, the fund return was 13.2%, while the lira weakened by 8.8%, yielding a net USD return of approximately 4.1%. Despite some currency volatility in March, the carry trade continued to deliver positive performance.
Now that the lira has returned to a more stable trajectory, the carry opportunity is once again becoming attractive. Daily and monthly simple returns on money market instruments are currently around 45%- 49%. Meanwhile, ex-post inflation stands at around 38% and is slowing, and the 12-month forward inflation expectation is approximately 25%. This environment offers positive real returns, encouraging investors to remain in TRY-denominated products rather than shifting to dollar-based assets.
If current trends continue, we expect quarterly USD-based returns to stay in positive territory, particularly if currency depreciation remains moderate.
5) What are some possible Sharia-compliant ways of implementing the trade?
There are several Sharia-compliant ways to implement a carry trade in Turkish lira. Investors can access TRY-denominated money market funds or sukuk funds that are structured in full accordance with Islamic finance principles. Alternatively, they may choose to invest directly in TRY-denominated sukuks issued by the Turkish Treasury, participation banks, or local corporates. Lastly, Sharia-compliant time deposit products commonly referred to as participation accounts also provide a practical and compliant means to benefit from Turkey's high-yield environment.
6) Geopolitical risks to the TRY carry trade?
Its important to emphasize that returns from this strategy come with open currency risk. If there's a geopolitical shock or a major external development, the Turkish lira could weaken sharply, which might result in the loss of not only returns but also part of the principal. That said, we continue to apply this strategy because the central bank remains focused on fighting inflation rather than stimulating growth. This policy priority-anchoring expectations through sustained real rates-provides a supportive backdrop for the carry trade. Given the risks, we implement this strategy in a measured and diversified way, allocating only a portion of client portfolios to TRY-denominated assets.
7) How does KT Portföy employ TRY carry trade in portfolios in practice?
We employ the carry trade strategy across all portfolio types-including multi-asset and USD-based mandates by maintaining selective exposure to TRY money market and sukuk positions, even within higher-risk funds. The yield pickup meaningfully enhances risk-adjusted returns.
Our main vehicles are Sharia-compliant money market and short-term sukuk funds, which offer daily liquidity while capturing Turkey's elevated real rates. These funds have attracted significant inflows, contributing to the growth of our AUM to over USD 8.5 billion and positioning KT Portföy as the 6th largest Sharia-compliant asset manager globally, according to IFN rankings.
8) What is the Sharpe ratio of the position?
The Sharpe ratio of this position was exceptionally strong in 2024, exceeding 5, thanks to stable yet high money market returns and a relatively orderly USD/TRY trajectory. In 2025, however, the ratio declined to around 1.5, primarily due to elevated currency volatility in March. Despite this, the strategy has continued to deliver positive risk-adjusted returns, particularly when implemented within a diversified portfolio framework.
9) Can the Turkish Lira carry trade serve as a diversifier in a global equity portfolio?
Yes. The correlation coefficient between S&P 500 index's daily returns and TRY carry trade's USD based daily returns is 0.01 (between 2 January 2024 and 27 May 2025). Hence, there is almost no correlation between this strategy and global equity.