Broken BIITS: Rate Hikes Not Boosting Confidence in EM ETFs

January 29th at 12:23pm by Tom Lydon

It was not supposed to be this way. Tuesday evening, Turkey’s central bank raised its overnight lending rate to 12% from 7.75% and more than doubled the overnight borrowing rate to 8% to 3.5%, sending the iShares MSCI Turkey ETF (NYSEArca: TUR) higher by 4.6% in after-hours trading, an uncommon after-hours move for any ETF.

That news, so it was thought, was supposed to provide some relief to downtrodden emerging markets ETFs. After all, Turkey took extreme measures to defend its lira. Investors have not just scoffed at the latest rate hike headlines from a Fragile Five, or BIITS, nation, they have sent TUR tumbling to a new 52-week on volume that is already more than 63% above the daily average. [Maybe Good News for the Turkey ETF?]

With the advantage of hindsight, the glum reaction to Turkey’s rate increase is not surprising. Money is now more expensive in Turkey, which will likely constrain economic growth. UBS has said the rate hikes will slow Turkish GDP growth to 2%. That is on par with a developed market like the U.S., leaving investors little incentive to take on the volatility of an emerging market like Turkey.

Again, the benefit of hindsight shows investors should not have been seduced by TUR’s Tuesday’s after-hours pop. A scorched-earth rate-hiking campaign by Brazil, the largest BIITS economy, has not  stemmed a price spiral and outflows from the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ). EWZ hit a new 52-week low today as well. Here is Brazil recent interest rate trajectory.

Chart Courtesy: Trading Economics

And here is how EWZ has performed over the past year as Brazilian rates have surged.

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