Flap With S&P Doesn't Derail Turkey ETF
The iShares MSCI Turkey Investable Index Fund (NYSE: TUR) posted a modest gain on Tuesday, but that was enough to have the high-flying ETF flirting with a new 52-week. One of 2012's top-performing emerging markets ETFs, the iShares MSCI Turkey Investable Market Index Fund has kept the good times going in 2013 with a gain of almost 2013.
That run seems and Tuesday's gain seem to indicate Turkey's flap with ratings agency Standard & Poor's does not mean much to Turkish equities or investors. On Monday, Reuters reported that S&P will no longer rate individual Turkish bond issues as of February 14. From that date onward, S&P will only issue a rating on the overall Turkish sovereign creditworthiness.
The flap between Turkey and S&P stems from the ratings agency decision in May 2012 to lower its outlook on Turkey's BB-rated sovereign debt to stable from positive. Turkey viewed the move as damaging to its goal of landing an investment-grade rating, which would lower the country's borrowing costs.
At BB, S&P has the same rating on Turkey that it has on Costa Rica, Guatemala and financially-challenged Hungary, to name a few. As is the case with some other noteworthy developing nations, Turkey is pressing for an investment-grade rating. And is the case with some of those other countries, such as the Philippines, Turkey can make a viable argument for why its sovereign debt is deserving of a rating above junk status.
The country is home to favorable demographics and a shrinking deficit, among other positive catalysts. Last year, JPMorgan raised its outlook on Turkey to Overweight from Neutral.
Speaking of upgrades, Turkey recently investment-graded status, just not from S&P. In November, Fitch Ratings upgraded Turkey's long-term foreign currency Issuer Default Rating (IDR) to BBB- from BB+ and the Long-term local currency IDR to BBB from BB. The outlooks on those ratings are stable.
Fitch also raised Turkey's short-term foreign currency IDR to F3 from B and the Country Ceiling to BBB from BB. In the wake of the issues with S&P, Turkish policymakers were quick to point out the country still has ratings agreements with Fitch and Moody's Investors Service. Moody's upgraded Turkey's sovereign credit rating to Ba1 in June 2012.
Regarding bond ETFs that offer exposure to Turkish sovereigns, the S&P news was equally as inconsequential as it was to TUR. Turkey is the largest country weight in the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSE: PCY), but that ETF only suffered a minor loss on Tuesday. Turkey is the third-largest county weight in PCY's chief rival, the iShares J.P. Morgan USD Emerging Markets Bond Fund (NYSE: EMB). EMB closed slighty higher on Tuesday. Both ETFs offer dollar-denominated exposure to emerging markets sovereign debt.
The iShares Emerging Markets High Yield Bond Fund (NYSE: EMHY) and the Market Vectors Emerging Markets Local Currency Bond ETF (NYSE: EMLC) feature allocations of 16.5 percent and 8.3 percent, respectively, to Turkey. Both traded just slightly lower on Tuesday.
In perhaps another sign that S&P's view on Turkish is not a deal-breaker for investors, this factoid is worth remembering: TUR had $627.4 million in assets under management as of November 6, 2012. At the start of trading on January 14, that number had surged to $874.4 million.
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