Market Overview

Keys To More Upside For The Turkey ETF

Keys To More Upside For The Turkey ETF

Up nearly 13 percent year-to-date, the Ishares Msci Turkey Inv Market Index Fd (NYSE: TUR) is one of this year's better-performing single-county emerging markets exchange-traded funds.

Turkish Delight?

TUR's bullishness this year's comes amid lingering concerns about the country's sovereign credit rating and seemingly always present political volatility. 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.

However, there are some signs TUR, though a volatile single-county offering, could continue delivering upside for investors. Importantly, some of those signs come courtesy of the country's central bank, which was previously criticized by global investors for being too slow to defend the lira and lacking the fortitude to take other important monetary policy steps.

Related Link: Banking Woes Not Over For Brazil ETFs

Ever Looming Banking Concerns

“A pro-growth bias is apparent in monetary policy. The Central Bank of the Republic of Turkey (CBRT) on Tuesday cut the top rate of the interest-rate corridor for the fourth time this year. Cumulative cuts in 2016 total 175 bp. Although billed as part of a planned simplification of monetary policy under new governor Murat Çetinkaya, the narrowing of the interest-rate corridor has occurred entirely at the upper end. With the interest-rate floor unchanged, the effective funding rate is falling, despite stubbornly high core inflation,” according to Fitch Ratings. 

Lower interest rates for Turkey are important because the country, perhaps more so than commodities-dependent emerging markets, has an economy that tilts toward the consumer. TUR somewhat reflects that as consumer staples and discretionary names combine for over 20 percent of the ETF's weight.

Other Factors

“Consumption-driven growth draws in imports, but the adverse effect on the current account is more than offset by lower oil prices. The CBRT reported this month that the current account deficit fell nearly USD1 billion year-over-year in April. This was the ninth consecutive monthly fall, and reduced the rolling 12-month deficit to a near six-year low, despite a drop in tourist arrivals, with Bloomberg reporting a 28 percent year-over-year fall in April on security concerns and Russian sanctions,” added Fitch.

TUR is also something of a direct play on monetary policy in the U.S. The longer the Federal Reserve holds off on raising interest rates, the more Turkish stocks benefit because of the country's still significant external financing needs, much of which is dollar-denominated.


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