Turkey ETF: Excellent Run, But Risks Ahead - ETF News And Commentary
14 Junio 2012 - 6:55AM
Zacks
Turkey ETF is up more than 19% year-to-date- a sharp reversal
from its disastrous performance (negative 36.3% return) in 2011,
thanks to solid investor interest, as the economy showed remarkable
resilience to the events in the euro-zone. (Read: Can the Vietnam
ETF Continue Its Run?)
With its GDP exceeding $1 trillion in 2011 (PPP terms), Turkey
is now the 17th largest economy in the world. Services
account for 64% of the economy, while industry and agriculture
account for 27% and 9% each.
Turkey introduced market reforms as per IMF bailout conditions,
after suffering a financial crisis in 2001. As a result of the
reforms, the country has witnessed excellent growth in the last
decade. (Read: Why Russia ETFs Are Not A Debt Crisis Safe
Haven)
The economy grew at an impressive 8.5% in 2011 but is expected
to slow down to 2.3% in 2012 and then rise slightly to 3.2% in
2013, per IMF.
Despite solid growth potential, the economy faces some serious
challenges from its growing current account deficit (~10% of GDP),
rising inflation and low savings rate. (Read: Spanish Bailout: Did
It Help European ETFs?)
The deficit is mainly being financed by short-term capital flows
(hot money- which can change direction quickly). Further, energy
imports account for about half of its current account deficit,
leaving the country vulnerable to increase in oil prices.
According to the central bank, $10/barrel increase in crude
price adds 0.4% to inflation, 0.7% of GDP to current account
deficit and reduces GDP growth by 0.5%, over one-year period.
(Read: PUW: Crushing The Clean Energy ETF Competition)
Though inflation touched 11.1% in April, the central bank has
maintained its target of bringing it down to 6.5% by the end of the
year. However per IMF, inflation is expected remain high at 10.6%
in 2012.
In order to control inflation the central bank has been
tightening monetary policy by varying the overnight rates for banks
while it has left the key rate unchanged. The central bank began to
tighten in the second half of 2011, which did result in controlling
the domestic demand to a certain extent.
Last month S&P revised the outlook on the country to stable
from positive due to concern that “less buoyant external demand and
worsening terms of trade could inhibit Turkey’s economic
rebalancing”. The agency maintained its sovereign rating at BB,
which is two notches below investment grade.
Fitch had lowered its outlook on Turkey in November last
year.
In fact, Turkey’s dependence on volatile foreign capital flows
is a matter of great concern for the economy, going forward. On the
other hand, Turkey does not attract much foreign direct investment
due to its rigid labor laws and regulations.
As pointed out in a recent World Bank report, growing imbalances
(high inflation, large and growing current account deficit), make
the country vulnerable to adverse developments in the investor
sentiment.
iShares MSCI Turkey Investable Market Index
(TUR)
TUR tracks the MSCI Turkey Market Index, which is a
capitalization weighted index that aims to capture 99% of the
Turkey equity market. The fund was launched in March 2008 and
has attracted $367 million in AUM so far.
The fund charges 0.59% annually for expenses. In terms of sector
exposure, financials constitute almost half (47%) of the assets,
followed by consumer staples (14%) and industrials (11%). Though
the ETF currently has 99 holdings, it is top-heavy, with the top 10
holdings accounting for almost 61% of the assets.
Turkey’s banks are adequately capitalized and the regulatory
norms are in compliance with the International norms.
With its focus on financials and heavy concentration is a top
few companies, the fund has actually managed to outperform the
Istanbul National 100 Index, which has returned 13.6%
year-to-date. The outperformance is also supported by
the currency’s more than 3% appreciation against the US dollar
this year.
However we may like to add that the Turkish Lira has been very
volatile and was down 17.5% (one of the worst performance among the
emerging market currencies) last year. The investors should thus
also keep currency volatility in mind while investing in this
fund.
ISHRS-MSCI TURK (TUR): ETF Research Reports
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