Is The iShares MSCI Turkey Investment Market Index Fund ETF Still A Strong Play?

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March 15, 2013 12:31pm NYSE:TUR

turkeyEric Dutram: Turkey remains one of the fastest growing economies of Europe despite the recent declines in their growth rate. In 2012, the growth rate dropped to nearly 3% from 8.5% reported in 2011, one of the steepest falls seen of late.

However, the country remains somewhat optimistic about its 2013 economic growth rate. The country expects to improve its economic growth to 4% in 2013 and anticipates inflation to fall with various infrastructure projects and logistics investment in the line-up.

Obviously, this growth rate, while reduced from historical levels, is far better than what many investors see in other markets in the region. This suggests that Turkey could be a better play for those seeking a broad Europe play at this time that still has growth prospects in its future.

After all, other factors are also positive on the country, specifically in terms of debt.

Last year, Fitch upgraded its credit rating on Turkey to investment grade. The long-term foreign currency Issuer Default Rating (IDR) was upgraded to BBB- (from BB+) and the long-term local currency IDR was upgraded to BBB (from BB+) after an 18-year wait (3 Emerging Market ETFs Protected from Global Events).

This is a step towards becoming a developed economy from an emerging market economy, a move which will boost the confidence of both investors and consumers and also attract more capital to Turkey from overseas.

However, an increase in the current account deficit remains a matter of concern for the economy as it is expected to increase to 7% of GDP from 6.8% reported in 2012 despite improved external and internal balances.

Turkey reported a fall in imports by 2.5% in 2012 while exports increased by 12%. The rise in exports is mainly due to export of gold. Excluding this precious metal, the economy reported a growth of just 2.5% in exports.

Successful market diversification and the depreciation in real effective exchange rate also added to export growth. The strong demand for export came from global and European markets and the country is expected to continue to benefit from global trade going forward.

However, the Turkish economy is highly dependent on foreign capital flows (in the form of direct investments) for economic growth. Going forward, the economy could face challenges if it fails to attract enough foreign inflows due to strict regulation.

A key to attracting foreign direct investment in the economy could be structural reforms which include better business regulations, adoption of employment strategy and execution of capital market law.

This will result in more investment from overseas leading to improved productivity and competitiveness of the country (A Trio of Top Emerging Market ETFs for 2013).

Turkey wishes to become one of the top ten global economies by 2023 for which it is required to grow at the rate of 6% in the medium to long term. By 2023, Turkey targets gross domestic product of $2 trillion, an increase from $775 billion in 2012.

Attributable to its strong resiliency to global turmoil and better-than-expected performance, Turkey stocks number among the best performing investment opportunities available for investors. And the best way to access these stocks is investing in a basket of securities, such as in a Turkey ETF, rather than in individual securities.

The iShares MSCI Turkey Investable Market ETF (NYSEARCA:TUR) was launched in March 2008. TUR is the only option available to investors seeking a pure play exposure in the Turkish equity space.

TUR has asset under management of $830 million and trades at volume levels of more than 300,000 million shares a day. This asset base is spread out among 90 Turkish securities.

The Turkey ETF portfolio consists mostly of the largest Turkish-listed stocks with a very small allocation made to small and mid cap securities.

While some might think that the dominance of large caps in the fund entails that TUR derives a big portion of sales from foreign markets, this isn’t really the case. Furthermore, TUR’s R-Squared value of just 42.9% with the S&P 50 indicates the fact that it is not very strongly correlated with the U.S. equity market performance and offers international diversification.

The Turkey ETF is heavily invested in the top ten holdings as 63.3% of the asset base go towards the top ten large caps. Most of these go to financial giants Turkiye Garanti Bankasi (13%) and AK Bank T.AS. (10.18%).

In fact the fund has more than half of its asset base invested in the financial sector (52.3%). Although financials has been a laggard for most of Europe—especially in nations like Greece (GREK) or central Europe (EWO) — the Turkish banking system appears to be quite strong as it has been one of the best performing sectors of the region.

Other than financials, industrials and consumer staples also get double-digit allocation in the fund with a share of 12.1% and 11.4%, respectively. Other sectors include telecommunication, materials, consumer discretionary, energy, health care, utilities and information technology.

TUR has been an incredible performer in 2012. It was one of the top performing emerging market ETFs. The fund gained a whopping 63.2% in the last fiscal year. The ETF started 2013 on a very strong note thereby continuing to show strength and delivering a return of 1% in the year-to-date period (Five Best Performing ETFs (So Far) in 2012).

As caveat, we note that the fund cannot be kept as a core holding in a portfolio as Turkey’s economic strength is rated as moderate to high by Moody’s. But the inclusion will likely improve the emerging market exposure of an investor, and certainly help to diversify U.S.-centric portfolios in the process.

This could make the Turkey ETF another great play in 2013, especially if it is able to maintain its strong Zacks ETF Rank of 2 or ‘Buy’ heading into the spring and summer months.

This article is brought to you courtesy of Eric Dutram From Zacks.

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