It has been a few months to forget for Turkey, as the once surging nation has faced a series of widespread protests and political uncertainty, stemming from issues in the country’s largest city, Istanbul. The main protests began against plans to develop a small park in the metropolis, but soon spiraled out of control with the focus being on many citizens’ displeasure with the path of the current Prime Minister, Tayyip Erdogan.
The unrest has also had a devastating impact on the country’s stock market with shares plunging across the board as foreigners flee the nation. It also hasn’t helped that there has been a general exodus away from emerging markets lately, further adding to Turkey’s woes (see Turkey ETF Crashes After Istanbul Protests).
The real pain lately, however, has been in the currency market, as the nation’s lira has faced incredible selling pressure. In fact, the currency has plunged by almost double digits since the start of May against the dollar, easily putting it into the bottom echelon of currencies against the greenback over the past two months.
Many are also growing extremely worried about the ability of the nation’s central bank to continue to defend the lira against outside shocks. The central bank sold $1.3 billion on Wednesday to boost the lira’s prospects, following a $2.25 billion sale of dollars on Monday. Now, according to Reuters, there have been sales of roughly $6.2 billion this year, suggesting that Turkey has already spend a decent sum on the defense of their currency (read Is the Turkey ETF in Trouble?).
This is pretty troubling as some estimate that the country’s total net reserves are below $40 billion now, not exactly a huge level considering how much has been spent this week alone. Plus, according to Reuters, ‘HSBC strategist Murat Toprak estimated that Turkey could afford to spend about $10-$13 billion of its reserves in defense of the currency,’ meaning that the nation is fast approaching its spending limit on currency stability.
If that wasn’t enough, rating agency Fitch also suggested that its credit rating could be at risk if the strife across the nation continues, potentially putting its investment grade level in jeopardy. Furthermore, bond yields have also been soaring, with Turkish Two-Year bonds rising through the 9.0% yield level, the highest in 2013 so far.
Turkey ETF Impact
As you might expect, this trend hasn’t exactly been great news for the Turkey ETF (TUR - ETF report) as of late. The fund has plunged by about 20% in the past three month period, with the bulk of the losses coming in the past eight weeks alone (see Winning ETF Strategies for the Second Half of 2013).
Furthermore, the ETF is down about 6% in the past five trading days, compared to a 2.3% gain for SPY and a -0.3% loss for VWO. So clearly TUR is greatly underperforming not only domestic markets, but broad emerging market benchmarks lately as well.
It also doesn’t help that much of the Turkish ETF is focused on volatile financial securities, with roughly 45% of the portfolio going to this sector. This segment will probably be among the most impacted by the sluggish lira trading, as well as the general risk off attitude in the nation.
Lastly, it is also worth noting that all of the fund’s assets are focused on lira-denominated stocks. Due to this lack of dollar denominated exposure, any lira slumps—when repatriated back to dollars—will hurt the performance of this ETF for U.S. investors.
While some investors may have thought that the worst was over for the Turkey ETF, this clearly isn’t the case. The nation is having significant trouble even now that the worst of the protests are over, as foreigners are still pulling capital out of the nation, preferring safer locations for their investments (read 3 Top Ranked International ETFs Still Worth Buying).
This trend has manifested itself in not only sluggish stock prices, but a slumping lira as well. The currency is becoming increasingly tough for the central bank to defend, and more losses may be likely in the future if the central bank is unable to put enough cash behind the currency to keep it propped up in the near term.
Given this, investors might want to avoid the Turkey ETF for the time being. The fund was once a solid performer, but those days seem like long ago; investors now have to contend with currency issues, political worries, and downgrade fears, a trio that you should probably stay far away from, especially in the volatile emerging market space.
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