Market Overview

Don't Bet On A Rebound For The Turkey ETF

Don't Bet On A Rebound For The Turkey ETF

The Ishares Msci Turkey Inv Market Index Fd (NYSE: TUR) is off just 0.8 percent this quarter, a showing far superior to the 3.4 percent lost by iShares MSCI Emerging Markets Indx (ETF) (NYSE: EEM).

However, investors might want to curb their enthusiasm for Turkish stocks and TUR. Judging by the outflows from the country's financial markets, investors are already doing just that.

“Investors from abroad withdrew $7.6 billion from assets in 2015, including $1.4 billion in outflows last month as the party that President Recep Tayyip Erdogan helped found swept back into power, initially triggering a rally in the nation’s assets. Declines resumed as the war in neighboring Syria and Russian sanctions threatened the country’s $720 billion economy,” according to Bloomberg.

Related Link: An Emerging Market With Dividend Growth Potential

Junk Rating Ahead?

Along with South Africa, Turkey is widely seen as the next major emerging market to possibly be downgraded to a junk credit rating after Brazil suffered that fate in September at the hands of Standard & Poor's.

In May, S&P downgraded its rating on Turkey's lira, one of this year's worst performing emerging markets currencies to "BBB-/A-3" from "BBB/A-2.”

At the time, the ratings agency said there is in a one-in-three chance it could downgrade Turkey's sovereign in six to 12 months. In September, S&P said Turkey is unlikely to see a stable government before the end of this year and that foreign investors are flocking out of Turkish stocks in droves.

Vulnerable Turkey

Turkey is also seen as one of the emerging markets most vulnerable to the Federal Reserve raising rates, which could happen in the coming days, because of the country's sizable external financing obligations.

“Turkey is among emerging markets with rising private-sector debt, increasing the dependency on external financing and threatening sovereign credit ratings, Fitch Ratings said in a report last week,” Bloomberg reported.

Some other factors are worth noting. First, Turkey has long had a contentious relationship with S&P several years. When S&P rivals Moody's Investors Service and Fitch Ratings upgraded Turkey's sovereign credit rating to investment-grade and S&P did not follow suit. Turkish leaders publicly complained, lobbing some feisty comments at S&P.

Second, in June, Moody's took the knife to its ratings on a batch of Turkish banks, which is bad for TUR because the ETF allocates 28.6 percent of its weight to the financial services sector. That is more than double the ETF's second-largest sector weight.

Investors have pulled $22.1 million from TUR this quarter, paring the ETF's year-to-date inflows to just $3.8 million.

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