Can The Turkey ETF Make New 2014 Highs? [Ishares Msci Turkey Inv Market Index Fd]

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June 5, 2014 4:35pm NYSE:TUR

turkeyThe year 2014 has proven lucky for the Turkey ETF, which has added about 19% so far in the time frame. First, election euphoria and then some market-friendly measures helped the fund to take one lap after another this year. Turkey is scheduled for a key national election this August.

Prior to this mega event, a crucial win of the ruling AK Party led by Prime Minister Tayyip Erdogan in local elections on March 31, provided the nation’s ETF a much-needed boost.

Investors should note that Turkey was the one of the hardest hit nations in 2013 when the taper talks commenced and political issues wrecked havoc on the country. Turkish currency lira lost about 18.6% in 2013.

To contain the slide in currency and gear up the nation’s growth, Turkey raised its overnight lending rate massively in January. While the extreme rise in key rates shored up the currency, Turkey’s growth slipped to the risky zone (read: Can Rate Hikes Save these Emerging Market ETFs?).

However, that was probably the last time Turkey witnessed some setback as since then the Turkish stock market was shifted to top gear. Not only the nation’s internal performance, but also low interest rates in the U.S. and sustained easy monetary policy in Europe helped the Turkish market to advance.

On May 22, the nation’s central bank slashed its one week repo rate by 50 bps to 9.5% on Prime Minister Tayyip Erdogan’s urges. On behalf of the central bank, a “decreasing uncertainty” has been notified to be the prime cause of the rate cut.

That’s not all; Erdogan has viewed this 50 bps of rate cut as inadequate to propel growth. In January, Turkey’s one week repo-rate was moved up from 4.5% to 10%. Now just a half bps cut does not make up for the impact of the already-high interest rate on economic growth.

The broader market seems enthusiastic on the possibility of a further and larger rate cut as evident by the 1.02% gain in iShares MSCI Turkey ETF (NYSEARCA:TUR) following Erdogan’s comment (on May 28).

Is All Well in Turkey? 

The policy tightening of the Turkish central bank cannot be blamed entirely. Annual inflation of Turkey was higher at 9.4% in April from 8.4% in March this year representing the highest level since April 2012. Investors should note that inflation grew every month on a sequential basis this year.

The Central Bank of Turkey (CBRT) expects inflation for 2014 to hit as high as 7.6%. While Turkey needs to quell inflation by raising rates, if not at least keeping the same intact, a rate cut has stunned many analysts and investors. Some as viewed it as a ‘politically-driven’ step.

Also, the lira declined soon after the building of hopes over a further rate cut. At least no one wants the sheer pain in currency again like last year. Not only this, consumer sentiment index also fell sequentially in May.  So, things are presently running hot and cold. The broader market outlook over emerging markets is still yet to improve completely.

The Fed continues to pare down its asset purchase program in a steady fashion. So, party time might be over in Turkey by the end of 2014 as the nation’s growth is highly dependent on foreign direct investment.

On a positive note, the central bank expects inflation to calm down in June though its annual forecast remains quite high. Thus, a rate cut is less likely in the coming days. Yet investors seeking to make the most of Turkey’s recent run can invest in the Turkey ETF (TUR), but definitely with a higher risk outlook.  

After all, with so much pain in 2013, Turkey logged a GDP expansion of 4%, much higher than many developed nations. The nation’s current account deficit has also narrowed from last year’s highs. Thus, a short-term bet can be considered at the current level (read: Is the Worst Over for These Emerging Market ETFs?).

TUR in Focus

TUR looks to track the MSCI Turkey Market Index. TUR invests about $563.7 million in assets in 98 stocks. The product has heavy concentration risk both in terms of sector and individual holdings. It has a clear tilt toward financial components, with the sector comprising more than 48% of the fund followed by consumer staples (13.0%) and industrials (13%).

Coming to company-specific holdings, Turkiye Garanti Bankasi A.S. has the maximum weight of 11.74% trailed by Akbank T.A.S. (8.70%) and Turkiye Halk Bankasi A.S. (5.84%). The fund invests about 60% of assets in the top-10 holdings.

The fund was up 6.5% in the past month. Though the fund’s simple moving average (9 days) is well above the 50-day moving average, the ETF has entered into the oversold territory, altogether giving mixed signals for the ETF’s future course.

Can TUR Hit 2014 Highs Soon?

Investors looking for a considerable rate cut might be expecting too much from the nation’s central bank if inflation stays high. The ETF is presently trading in the middle of its 52-week range and is yet to go a long way to touch its 52-week high. Thus, the possibility is feeble for the ETF to score a 2014 high anytime soon. Turkey ETF possesses a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook.

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