was completely washed out in 2013 with the same ETF plunging about 28%.
Concerns about the decline incheap money inflows thanks to QE taper threat in the U.S., a tumbling currency, current account deficit, high inflation and political unrest put Turkey ETF in serious trouble.
Though the ETF started 2014 on the same old note shedding about 7% in the first two-an-half month phase, things took a sharp turn in late March on election hopes. The pure-play on the Turkish stock market – iShares MSCI Turkey ETF (NYSEARCA:TUR) has been on an uphill ride gaining about 23% within just 20 days.
Election Euphoria Drove the Market
Turkey is due for a presidential election this August. In the recent past, Turkey hit headlines for political woes and a clash between the Prime Minister and several Turkish political parties.
Initially it was thought that Turkey might go through a chaotic voting process this year, but a crucial win of the ruling AK Party led by Prime Minister Tayyip Erdogan in local elections on March 31, proved all apprehensions wrong.
As per Reuters, moderation in political tension and a market-friendly backdrop helped the Turkish stocks stay steady leading to this gigantic pre-election rally (read: 3 Emerging Market ETFs to Watch for Political Issues in 2014).
Some Respite for Lira
Not only election excitement, some potential measures to support its struggling currency, the lira, also lent helping hands to the Turkey ETF. The Turkish central bank recently declared that it may pay interest on the lira portion of the banks’ required reserves.
Investors should note that Turkish lira was among the most hurt emerging currencies in 2013 (down about 18.6%).
Thanks to the initiation of the Fed’s QE taper in the start of this year, a risk-off trade sentiment prevailed in the market causing the escape of foreign investments from these emerging nations. Thus, to hold back further fall in its currency, Turkey raised its overnight lending rate sharply on January 28 from 7.75% to 12%, one week repo-rate from 4.5% to 10% and overnight borrowing rate from 3.5% to 8%. However, all these initiatives paid off and the Turkish lira gained about 6.5% (as of April 10) since March 23.
Could This Rally Persist?
While exorbitant rate hike shored up the currency to a large extent, it is deemed to hurt the nation’s growth profile. Turkey’s economy expanded 4% last year (per the official Turkish data) with significant slowdown noticed in the second half of the year. The government expects the nation to score the same 4% growth rate this year as well.
However, in contrast to Turkey government, the IMF recently had a forecast of 2.3% growth rate this year (tapered from its earlier projection of 3.5% made last October) and 3.1% for the next. Elevated borrowing costs, a still-stressed currency and a steep decline in private consumption are considered responsible by the IMF for this expected slowdown.
The nation is also buckling under inflationary pressure, resisting policymakers to lower interest rates. The IMF lifted its consumer price inflation forecast to 7.8% this year from the previous guidance of 5.3% issued in October. Inflation rate is expected to calm down to 6.5% in 2015. Notably, current account deficit projection was as high as 6.3% this year and 6.0% for 2015.
Investors expect Turkish growth to surprise on the upside if the central bank cuts rates and political instability subsides. Though the Turkish central bank has for the first time hinted at a rate cut, nothing is finalized yet.
Also, the enthusiasm that stemmed from the election win looks like a fleeting phenomenon. Per analysts, the elections in Turkey did not have any abiding effect on the markets, at least in recent years. Most of the analysts view this bullish trend to end shortly. Investors should note that Turkey ETF lost 2.89% in its past two tradings (as of April 10, 2014) (read: Will Election Hopes Boost The Fragile Five Emerging ETFs?).
TUR in Focus
TUR looks to track the MSCI Turkey Market Index. TUR invests about $629 million in assets in 98 stocks. The product has heavy concentration risk both in terms of sector and individual holdings. It has clear tilt toward financial component, with the sector comprising more than 47% of the fund followed by consumer staples (13.9%) and industrials (13%).
Coming to company-specific holdings, Turkiye GarantiI Bankasi has the maximum weight of 11.72% trailed by Akbank T.A.S. (8.58%) and BIM Birlesik Magazalar AS (6.60%). The fund invests about 60% of assets in the top-10 holdings.
The fund was up 10.34% this year. Apart from election gusto, dirt cheap valuation helped the fund to fly high past month. Though the fund’s simple moving average (9 days) is higher than 50-day moving average, the ETF has entered into the oversold territory, altogether giving a mixed signal to the ETF’s future course.
Turkey ETF possesses a Zacks ETF Rank #5 (Strong Sell) with high risk outlook.
This article is brought to you courtesy of Eric Dutram.