LONDON (Jan 31): Emerging stocks touched one-week lows on Tuesday but were headed for their best January since 2012, benefiting from expectations of reflationary US policies, though Turkish assets lagged with the lira set for its fifth month in the red.

Emerging markets have got off to a strong start to 2017, with stocks and bonds generally outperforming their developed peers.

While MSCI's emerging equity index tracked global stocks 0.6% lower on Tuesday due to renewed worries about the impact of the new US administration's trade and migration policies , the benchmark is up 5.5% in January, its best monthly return since March.

As the dollar index slipped almost 2% over the month, emerging currencies mostly strengthened, led by last year's winner, the Brazilian real. The 2016 laggards — Mexican peso and Turkish lira — were again bringing up the rear.

"Part of it is US dollar strength which hasn't really come through and people have been positively surprised on how EM currencies have held up despite idiosyncratic risks in some places like Turkey," said Julian Mayo, co-CIO at Charlemagne Capital.

"Markets are also responding to the fact that many EM currencies have halved in value in recent years and now look very undervalued."

One of the worst hit is the Turkish lira which is down 70% against the US dollar since mid-2008, more recently due to political turmoil following a failed coup, militant attacks and a crackdown on perceived opponents of President Tayyip Erdogan.

Investors are also concerned about the Turkish central bank's piecemeal approach towards policy tightening.

The lira has lost 7% to the US dollar this month, its worst start to a year in almost a quarter century, and fell another 0.4% on Tuesday as data showing continued sharp falls in tourism revenues highlighted the fragile state of the economy and current account.

Meanwhile the central bank upped inflation forecasts but signalled it would stick to the unorthodox steps it has taken to support the lira so far.

BlueBay strategist Tim Ash said bank governor Murat Cetinkaya's commitment to a range of interest rates instead of a single benchmark was deepening confusion.

"(It's) kind of the problem, creates a lack of transparency and the market is left trying to figure out whether policy is tight or loose, and how long that is likely to last," Ash said.

Istanbul stocks meanwhile are at nine-month highs, and shares of export-oriented firms such as white goods maker Arcelik and carmaker Ford Otosan at multi-year or record highs .

Charlemagne's Mayo said he was not tempted just yet.

"I suspect that some point in the next three months it will a good buy but only when the currency bottoms, for now it's more of a wait-and-see," he added.

On the bonds front, emerging hard currency sovereign debt yield spreads over Treasuries were at 325 basis points, around 17 bps tighter than end-2016.

Emerging currency debt has returned around 2% this year in US dollar terms, according to JPMorgan's GBI-EM index.