Turkey ETF In Focus On Political Worries [Ishares Msci Turkey Inv Market Index Fd]

July 11, 2014 4:48pm NYSE:TUR

turkeyTurkey – a member among the Fragile Five group of emerging nations – seems to be quite sensitive to internal as well as external shocks.


iShares MSCI Turkey ETF (NYSEARCA:TUR) – the only ETF with a focus on the country – suffered through a volatile last month due to rising geo-political tensions in Iraq. The situation aggravated when armed militants from the Islamic State in Iraq and Syria (ISIS) took 50 hostages from the Turkish consulate in Mosul.

Meanwhile, the tensions are also spilling over in the Turkish economy as well. The rising insurgency threat in Iraq is hitting Turkish exports to key markets, and could keep this sector subdued.

On top of suffering Turkish exports, political tensions ahead of the upcoming elections in Turkey have reared their heads too. The country is scheduled for presidential elections this August and there is already plenty of speculation about the vote.

TUR took a beating on the first trading day of the month as the country’s ruling party announced that it is nominating Turkey’s Prime Minister Recep Tayyip Erdogan to become the country’s next president.

Several opinion polls have shown that Erdogan is quite popular among the majority of Turkish people, indicating high chances of his being selected for the post. Erdogan will be facing two candidates for this race – the opposition candidate Ekmeleddin Ihsanoglu and the pro-Kurdish politician Selahattin Demirtas.

After more than a decade of feisty rule, the premier Erdogan as the presidential candidate has promised to step up peace efforts in Turkey’s Kurdish southeast, unite an increasingly fragmented nation, and actively pursue full EU membership for the country.

However, fears are also widespread that if Erdogan does win there might be over-centralization of power and that Turkey’s development model might move away from a European Union-oriented, democratic model, as per Timothy Ash, chief economist for emerging markets at Stand Bank Group.

Wolfango Piccoli, managing director at Teneo Intelligence, believes that Erdogan “will bring to the office his own style of aggressively defiant government, typified by micro-management, bullying of opponents and a penchant for polarization rather than conciliation.”

Moreover, experts believe that Erdogan’s coming to power will likely affect the working of key independent bodies and institutions, including the central bank. He is already believed to have put pressure on the central bank for bringing about the first rate cut of  50 basis points during May this year (read: Easy Money Policies in Europe are Great for These European ETFs).

Subsequently, the bank implemented a 75 basis point cut in its key rate on the back of improving global liquidity conditions and a better picture on the inflation front. Experts believe that there might be more rate cuts ahead due to political pressure. Though a rate cut might certainly boost the country’s growth, it however is expected to exacerbate the country’s already high level of inflation.

Though the country’s inflation fell to 9.16% in June from a two-year high of 9.66% in May, it is nonetheless above both the central bank’s year-end forecast of 7.6% and its 5% medium-term target.

Even the Organization for Economic Cooperation and Development (OECD) has emphasized that Turkey needs to achieve financial stability and curb inflation to balance growth.

The OECD has, however, raised its growth forecast on Turkey for this year to 3.3%, from its previous forecast of 2.8%. The organization has, however, cited domestic political tensions, renewed troubles in the Euro zone and monetary policy changes in the U.S. as some of the impediments to growth.

ETF Impact 

Given Erdogan’s popularity and the recent upgrade by OECD, Turkey ETFs have managed to move slightly higher as of late. TUR has gone up roughly 3.4% in the past five trading days.

For investors keen to exploit the recent surge and willing to place a short-term bet, we have highlighted in detail about the ETF below (see all European Equity ETFs here).

TUR in Focus

Launched in March 2007, TUR tracks the MSCI Turkey Investable Market Index to provide exposure to Turkish equities.

The fund provides concentrated exposure to a basket of 89 stocks. The top three holdings – Turkiye Garanti Bankasi, Akbank and Turkcell Iletisim Hizmetleri – together occupy one-fourth of total fund assets.

Sector-wise, Financials dominates the product having a little less than half of the total fund exposure. Apart from this, Consumer Staples (13.8%) and Financials (12.5%) are the two other sectors with double-digit exposure, while Utilities, Health Care and Information Technology have the least exposure in the fund.

The fund charges 61 basis points as fees and has returned 20.4% in the year-to-date frame.

Bottom Line

There might be a short-term spike in the above ETF on the back of an upgrade and chances of more rates cut following a slowdown in inflation. We however have a Zacks ETF Rank #5 or Strong Sell Rating on TUR and believe that the fund might have a bumpy road over the long run.

The country need’s to solve some of its key issues including high levels of inflation, huge current account deficit and slow down of exports to get a clean bill of health. Until then, look for some more volatility in this ETF, and especially so as election day gets closer.

This article is brought to you courtesy of Zacks.com


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