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Turkey ETF in Focus on Rate Cut and Credit Upgrade

TUR VGK

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Many European countries, along with India, Australia, Israel and South Korea, are seeking to boost economic growth and weaken their currencies. Turkey, too, is fast catching up with this trend of announcing monetary easing policies in an effort to jumpstart growth.

Turkish Economy & Outlook

Turkish economic growth dropped sharply to 2.2% in 2012 after rising more than 8% in both 2010 and 2011. This indicates that Turkey is no longer expanding as fast as it was in the past, dulling the prospects of a rising economy. However, the country’s inflation rate fell to 6.13% in April this year, the lowest level in two years.

As inflation fell, the central bank lowered all three of its major interest rates last week by 50 bps, pushing the benchmark overnight repo rate to 4.5%, borrowing rate to 3.5% and the lending rate to 6.5% (read: Turkey ETF Surges on Falling Inflation). This would certainly boost the slowing economy and guard against Turkish Lira appreciation in the future.

After all, a strong Lira makes Turkish exports expensive and imports cheaper, widening the current account deficit, which remains a big concern for the economy. The current account deficit is expected to increase to more than $58 billion at the year end from $47 billion in 2012.

Good News Beyond the Cut

Moody’s also upgraded Turkey to investment grade for the first time in two decades, signaling improving prospects for the nation. According to the rating agency, the upgrade resulted from, “the structural improvements and institutional reforms in the economy as well as public finances that will better insulate it from external shocks”.

This is a step towards becoming a developed economy from an emerging market economy, a move which will boost the confidence level of both investors and consumers. It should also attract more capital to Turkey from overseas and thereby lead to improved productivity and competitiveness.

The nation has good medium-term growth prospects and a diverse economy. The country’s debt-to-GDP ratio has fallen by 10% to a manageable 36% since 2009 and is much lower than the debt-to-GDP ratio of many developed economies. So the issue of deleveraging is not a matter of concern for the country (read: Turkey ETF: Still a Strong Play?).

Further, Turkey already has a low unemployment rate, solid banking system, government reforms and an improved credit rating. Given these solid growth prospects, Turkey could prove to be the best investment market in Europe for years to come.

Given these positive trends, investors might want to think about putting capital to work in the nation. Arguably, the best way to access these stocks is by investing in a basket of stocks, such as in the Turkey ETF, rather than in individual securities. For investors planning on taking this route, we have highlighted the only Turkey ETF in the market in greater detail below:

iShares MSCI Turkey Investable Market ETF (TUR)

Launched in March 2008, TUR is the only option available to investors seeking a pure play exposure in the Turkish equity space. With holdings of 97 securities, the fund consists mostly of the largest Turkish-listed stocks with a very minor allocation made to small and mid cap securities.

The ETF is heavily concentrated on its top 10 holdings into which it puts 62.75% of the total assets. Hence, the returns of the fund are largely dependent on the performance of the top 10 firms (see more ETFs in the Zacks ETF Center).

In terms of sectors, more than half of the assets go to financials with three giants, Turkiye Garanti Bankasi, AK Bank T.A.S. and Turkiye Halk Bankasi, making up a combined 30.45% share.  Other than financials, industrials and consumer staples also get double-digit allocation in the fund with a share of 12.50% and 11.50%, respectively.

The product has amassed $970 million in its asset base and trades in good volume of more than 310,000 shares a day. The fund sports a distribution yield of 1.32% and charges 60 basis points in fees and expenses.

The Turkish ETF has been the best performing emerging market ETF in Europe this year and has clearly outpaced the broad market funds of Europe (as indicated by (VGK - ETF report) by a wide margin. The ETF has added 12.1% in the year-to-date timeframe (read: 3 Emerging Market ETFs Still Going Strong).

Bottom Line

The ETF and the Lira currency have been volatile in the last week due to the rate cut and Moody’s upgrade. Still, the product could be a good choice for investors seeking international diversification as it has a three-year R-Squared value of only 64% with the S&P 500, implying that it is not strongly correlated with the U.S. equity market performance.

TUR currently has a Zacks ETF Rank of #2 or ‘Buy’, suggesting that it will continue to outperform this year, and thus be an excellent choice for investors seeking a different type of emerging market exposure in the months ahead (read: Zacks ETF Rank Guide).

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