An array of emerging markets bond ETFs, including the ProShares Short Term USD Emerging Market Bond ETF (BATS: EMSH), iShares Emerging Markets High Yield Bond ETF (NYSEArca: EMHY) and the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB), the largest U.S.-listed emerging markets bond ETF, could be adversely affected by a downgrade to Turkey.

Additionally, Turkish equities must contend with valuations that are frothy compared to much of the developing world.

“Absolute and relative valuations of Turkey’s equity market appear expensive by comparison with many of its Eastern European, Middle Eastern and African (EEMEA) peers, except for South Africa (15.8x), Poland (14.3x) and the Czech Republic (13.2x). Trading at a 1.6 point premium to its EEMEA benchmark and a hefty 5.2 point premium to its Eastern European bellwether, Turkey’s positive-adjusted, one-year forward price-earnings multiple (p/e) of 11.3x may be well below its record high (25.8x), but exceeds its all-time low by 10.4 points and is a full 2 points above its historical average (9.3x). While some analysts have made a case for p/e multiple expansion, inauspicious economic forecasts would appear to rule out such a possibility,” said S&P Capital IQ.

iShares MSCI Turkey ETF


Tom Lydon’s clients own shares of EMB.