Turkey ETF In Focus On Weak Growth And Political Tensions [Ishares Msci Turkey Inv Market Index Fd]

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September 30, 2014 5:06pm NYSE:TUR

turkeyThere seems to be no respite for iShares MSCI Turkey ETF (NYSEARCA:TUR) – the sole ETF focusing on politically torn Turkey. The fund has been bleeding for the past two months and in fact has been the worst performing fund

in the emerging market space in the past month.

While political and geopolitical tensions were already playing it foul, weak second-quarter GDP has further dampened sentiments. TUR has shed roughly 8% in the past two weeks following Turkey’s disappointing growth numbers.

Turkey expanded by a lesser-than-expected annualized rate of 2.1% in the second quarter as against a revised 4.7% growth seen during the first quarter of the year. Further, on a calendar and seasonally-adjusted basis, the country’s economy has contracted by 0.5% (q-o-q) during the second quarter – the first contraction since the first quarter of 2012.

Rising geopolitical tensions, slumping exports due to sluggish growth in Europe and tight monetary policy are some of the factors hitting the country’s growth, as per Turkey’s Finance Minister Mehmet Simsek.  These factors might lead the government to miss its 4% economic growth target this year.

Can the Nation’s Central Bank Help?

With weakening growth, one would naturally expect the central bank to act and bring down interest rates. However, the nation’s central bank is in a tricky situation as any further rate cut is expected to exacerbate the country’s already high level of inflation. The nation’s inflation currently stands above the 9% mark, well above the central bank’s targeted range of 3% to 7%.

Stubbornly high inflation has in fact led the central bank to keep its key rates unchanged last week. The country’s weakening currency, the lira, in the face of an expected tightening in the U.S. monetary policy is also a reason to keep rates on hold. One should not forget that external risks and rapid credit growth have made Turkey one of the most vulnerable emerging market nations to U.S. monetary tightening.

Having said that, slowing growth is likely to put pressure on the central bank to lower interest rates at a time when the nation’s inflation rate is on the rise. The country’s President – Tayyip Erdogan – blamed for an over-centralization of power, might induce the bank to lower rates (read: Turkey Election Results No Comfort for Turkish ETF).

While that remains to be seen, a weak second-quarter GDP and no rate cut by the central bank are taking toll on the Turkey ETF for now.

TUR in Focus

TUR tracks the MSCI Turkey Investable Market Index to provide exposure to Turkish equities having an asset base of $449.1 million. The fund trades in good volumes of little less than 300,000 shares a day, while charging 61 basis points as fees.

The fund provides concentrated exposure to a basket of 88 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 (13.7%) and Industrials (13.2%) are the two other sectors with double-digit exposure.

We have a Zacks ETF Rank #5 or Strong Sell Rating with a “High” risk outlook on this fund and believe that the ETF might have a bumpy road over the long run, unless some of the structural problems within the country are resolved.

This article is brought to you courtesy of Zacks.

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