The iShares MSCI Turkey ETF (NYSEArca: TUR) is one emerging markets exchange traded fund that is probably looking forward to 2016 coming to an end.
As has been widely documented, 2016 has been, broadly speaking, a renaissance year for emerging markets stocks and ETFs.
TUR is an exception as highlighted by the ETF’s 8.5% year-to-date loss. However, the lone ETF dedicated to Turkish stocks is up 5.4% over the past week and that could be luring some investors back to the fund without acknowledging that significant risks remain.
In July, Turkish stocks and TUR tumbled following a failed coup. Turkish markets plummeted on concerns of the implications of the ensuing political turbulence after a failed coup d’etat attempt from the military branch.
In August, Turkey’s central bank lowered interest rates by 25 basis points to 8.75% and said it stands ready to provide liquidity to the country’s banks, if needed, an important factor considering TUR’s weight to financial services stocks is almost 44%, or more than triple the ETF’s second-largest sector allocation.
Following the July coup attempt, S&P Global Ratings cut the country’s sovereign debt rating to BB/B on concerns over an increase in political risk after the failed putsch, reports Bloomberg. Moody’s Investors Service also put a number of companies on review for a downgrade and is reviewing the sovereign for a possible downgrade.
“Twelve-month foreign direct investment (FDI) has shrunk to $10.7 billion, the lowest since June 2013. FDI covers only 32% of the current account deficit (the lowest coverage since mid-2015), making Turkey more dependent on hot money even as sentiment on EM sours,” according to a Brown Brothers Harriman note posted by Dimitra DeFotis of Barron’s.
The administration is pursuing those accused of being behind the coup and has arrested thousands of army officers, judges, teachers and prosecutors.
Some market participants believe political risk in Turkey exceeds that of other emerging markets, meaning it is too soon for investors to consider supposed bargains in Turkish stocks.
“The lira has generally underperformed … Turkish equities have underperformed this year after a decent 2015. … This underperformance should continue, as our EM Equity model has Turkey at a VERY UNDERWEIGHT position,” according to the BBH note seen in Barron’s.
For more stories on the lone Turkey ETF, visit our Turkey category.