The iShares MSCI Turkey ETF (NYSEArca: TUR) has been one of the most embattled single-country emerging markets exchange traded funds thanks in large part to a tumbling lira and speculation that Turkish equities are among the developing world’s most vulnerable to hawkish changes in Federal Reserve interest rate policy.
While TUR has joined in on the emerging markets bounce in recent days, the long-term outlook for the once vibrant Turkish economy is, in the eyes of some market observers, unsettling.
Global investors are dumping Turkish bonds, making the lira one of the worst-performing emerging currencies against the dollar this year. The central bank is under increased pressure to act in order to assuage market fears and prop up the quickly depreciating lira currency, especially in an uncertain political climate where there is rising risk of a snap election – President Tayyip Erdogan could call for a snap election on August 23 if a coalition government has not formed. The government has been the most vocal about cutting interest rates to stimulate growth. [Central Bank no Help to Turkey ETF]
Istanbul’s benchmark stock index has underperformed the MSCI Emerging Market Index amid political upheaval – Turkey’s ruling party failed to secure a majority in the June national elections, which created uncertainty in the markets as the country works on hodgepodge coalition.
Additionally, the slack performance turned in this year by Turkish stocks deals a blow to the notion that the country, a net oil importer, would benefit from slumping oil prices.
“According to the IMF’s latest forecasts, there will be a current account deficit of more than 3% of GDP in five years’ time in seven countries in the Peterson Institute’s sample: Turkey, New Zealand, South Africa, Poland, Brazil, the United States and Australia,” said Capital Economics in a note posted by Dimitra DeFotis of Barron’s.
“Generally investors should be aware that the MSCI Turkey Index is not a good proxy of the Turkish economy. The index is heavily biased towards financials (around 43%), whereas the sector represents less than 5% of the country’s GDP. The TUR ETF provides diversification benefits when added to an equity strategy as it offers the following correlations vs: EEM (0.7) and SPY (0.47),” according to Emerging Equity.
For the daring bargain hunter, Emerging Equity recommends TUR “as a satellite position within a global world or a global emerging markets or a more local EM strategy strategy. Investors should always check the allocation of the country within their underlying benchmark in order to play it on a tactical basis.”
“Admittedly, the fact that a currency is fundamentally overvalued does not mean that it will adjust anytime soon – other factors may play a more important role in determining its level in the near term. But countries whose currencies are in this position are clearly comparatively exposed to tighter monetary conditions. Accordingly, the South African rand, New Zealand dollar and Turkish lira are likely to remain at risk when Fed tightening comes back onto the agenda – even if that isn’t until next year,” according to Capital Economics.
iShares MSCI Turkey ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.