Amid fresh U.S. sanctions, the iShares MSCI Turkey ETF TUR is in the spotlight again and not in a good way.
On Monday, the lone U.S.-listed exchange traded fund dedicated to Turkish equities slid 3.89% on volume that was more than triple the daily average, extending its weekly decline to nearly 9%.
What Happened
On Monday, President Trump ordered a 50% tariff on Turkish steel imports to the U.S. while halting trade talks with the country. The $326.4 million TUR, which tracks the MSCI Turkey IMI 25/50 Index, is levered to that harsh move against Turkey's steelmakers because the fund devotes about a third of its weight to the industrial and materials sectors.
“This Order will enable the United States to impose powerful additional sanctions on those who may be involved in serious human rights abuses, obstructing a ceasefire, preventing displaced persons from returning home, forcibly repatriating refugees, or threatening the peace, security, or stability in Syria,” the president said in a statement posted on Twitter.
Why It's Important
While Turkey once again finds itself on the wrong side of a geopolitical debate, the often volatile TUR could be further pinched by issues weighing on Turkish banks, a sector that's the fund's largest at 27.56%.
“We stressed the eight largest Turkish banks' capital ratios in six separate stress tests over a two-year period, from end-1H19, for a sharp rise in non-performing loans (NPLs), weaker profitability and lira depreciation,” said Fitch Ratings in a recent note. “In our view, these factors constitute the key risks to the banks' solvency. PIP provides the first line of defence against asset quality weakness and a buffer to absorb increased impairment charges without hitting capital.”
Geopolitical upheaval could further pressure the lira and credit quality at Turkish banks, particularly those that aren't state-run.
“The D-SIBs (private sector Turkish banks) are among Turkey's most active borrowers from international markets and have the largest customer deposit bases,” said Fitch. “Significant asset quality deterioration, as well as affecting solvency, may weaken creditor sentiment and make it harder to refinance foreign debt. A prolonged loss of market access could put pressure on banks' liquidity positions, as could deposit instability.”
What's Next
In a word: volatility. TUR has a three-year standard deviation of 34.7%, more than double the comparable metric on the MSCI Emerging Markets Index.
Over the past 90 days, TUR has been 850 basis points more volatile than the MSCI Emerging Markets Index.
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