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The Turkey ETF Is, Well, A Turkey

August 14, 2015 12:52 pm
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The Turkey ETF Is, Well, A Turkey

The iShares MSCI Turkey ETF (NYSE: TUR) was trading modestly higher Friday and while those gains can be measured in mere pennies, they are enough to keep the lone Turkey exchange traded fund from making another multi-year low.

Turkey has long been mentioned as one of the emerging markets most vulnerable to shifts in the Federal Reserve's interest rate policy. No change in that policy has become official as of yet, but markets see a rate hike as imminent and have treated TUR as such. The ETF has tumbled almost 26 percent this year and now resides near 3 1/2-year lows.

BlackRock Global Chief Investment Strategist Russ Koesterich recently highlighted Poland and Turkey as two the emerging markets most vulnerable to rising U.S. interest rates.

“The MSCI Poland Index has consistently underperformed the broader MSCI EM benchmark over the last 10 years. This underperformance could continue should a Fed rate hike lead to capital outflows. Meanwhile, Turkey’s economic imbalance similarly puts it in a position of vulnerability,” he said in a note out earlier this month.

An increasingly volatile domestic outlook, one that has seen violence escalate and the chances of a second general election this year surge, is also hampering TUR.

“Investor sentiment toward the $800 billion economy soured after the AKP lost its parliamentary majority in June for the first time in more than a decade. A suicide bombing last month blamed on Islamic State, and the subsequent collapse of a peace process with the nation’s restive Kurdish minority, pushed Turkey’s risk premium to the highest level in more than a year,” according to Bloomberg.

Although TUR is not heavily allocated to commodities-related sectors (materials and energy names combine for just 14.8 percent of the ETF's weight), the fund has been stung by the tumbling lira, one of the worst-performing emerging markets currencies this year. One dollar currently buys about 2.8 lira, but some foreign currency analysts see $1 buying three lira in the coming weeks as political uncertainty weighs.

Where TUR is really feeling the pinch of lower lira and rising political volatility is through its exposure to the financial services sector. Turkish banks are among the Arab world's most profitable, but those profits are expected to decline this year, with analysts citing the weak lira as a primary culprit.

“The Banks Association of Turkey (TBB) forecast average net profit growth of 8 percent for banks in 2015 at the start of the year, while some research analysts had even higher expectations of around 10 to 14 percent,” according to Reuters.

That is bad news for TUR because the ETF allocates 43.3 percent of its weight to financial services stocks, nearly triple the weight to its second-largest sector exposure.

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