The often controversial and volatile iShares MSCI Turkey ETF (NYSEArca: TUR) is up nearly 12% year-to-date and some market observers believe Turkish equities can continue climbing even as the country’s currency, the lira, declines.
Still, Turkey can be one of the most politically volatile emerging markets, a trait that has previously weighed on TUR and Turkish stocks.
Last year, 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.
“Turkey’s response to its ongoing economic forces of negative growth, high unemployment, high inflation, and sustained capital outflows has been to prioritize the growth and employment elements through a loose monetary policy. This has yielded negative interest rates in real terms and has consequently supported a long position in Turkish equities by dropping the discount rates in the market,” according to a Seeking Alpha analysis of the Turkish economy.
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. Additionally, there are lingering concerns the country could be tagged with another credit downgrade this year.
Furthermore, the increased security risks also pressured investors’ outlook, notably the Islamic State claimed that the New Year’s attack at the Reina nightclub shortly after Istanbul rang in the new year.
“Turkey has historically been a very volatile economy, diving to under (negative)-10% growth during the dot-com bust and financial crisis and having more than 5% year-to-year changes during more stable periods. Over the next decade a 3%-4% real growth rate is likely more realistic and doable with the country’s young demographics (average age of 31), increasing middle class, and broad number of trade partnerships,” according to Seeking Alpha.
For more stories on the lone Turkey ETF, visit our Turkey category.