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Turkey ETF Tastes Yummy This Thanksgiving: What's Next?

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While setting the table for a Thanksgiving dinner, most attention probably goes to the roasted Turkey.

But apart from the bird, another Turkey has been hogging investors’ attention this Thanksgiving. Yes, we’re talking about the country.

The country’s investment scenario has improved as the pure-play iShares MSCI Turkey ETF (TUR - Free Report) added about 12% in the past month (as of Nov 21, 2022), breezing past 8.2% gain recorded by the S&P 500. So far in 2022, the Turkey ETF jumped 62.5% against 17% losses in the key U.S. equity gauge.

What’s Behind the Rally?

The Borsa Istanbul 100 index has been hovering around a record high as investors continued to use equities as a hedge for surging prices and a falling lira. The central bank has been slashing rates massively, adding to the 850 bps reduction of the key rate since September 2021, per tradingeconomics. This has bolstered the equity market.

The lira has fallen 55% during the period and consumer inflation has increased past 85% in October, the highest in 24 years, reinforced by largely negative real interest rates and costly measures to stabilize the lira amid pressure from President Tayyip Erdogan. Consequently, trading volumes sharply increased since the start of the TCMB's rate cut path, as Turkish residents looked for assets to store their savings.

Will the Rally Break Down Ahead?

Things from here do not look promising. The annual inflation rate in Turkey increased further to 85.5% in October 2022, from 83.5% in the previous month, and in line with market forecasts of 85.6%. The inflation rate in Turkey has risen for 17 consecutive months. It marked the highest rate since June of 1998, as the lira extended record-lows and the central bank cut interest rates.

Despite the Turkish Statistical Institute’s official inflation numbers, third-party figures are even more scary. Economists stemming from the Inflation Research Group (Enag) detail that Turkey’s annual increase in inflation is closer to 185%, as quoted on an article published on bitcoin.com.

The Turkish economy expanded by 7.6% year over year in the second quarter of 2022, picking up from the 7.3% growth in the previous period and above market forecasts of a 7.5% increase. On a seasonally and calendar adjusted basis, the economy grew by 2.1% from 1.2% in the first quarter.

Against this backdrop, we can conclude that Turkish GDP is able to expand due to rate cuts. According to a Reuters poll, Turkey's central bank is expected to slash rates by another 150 basis points this week to 9% and stay put thereafter. If rate cut cycle stops here, lira may gain strength, which should bode well for the currency and the economy. We expect the Turkish stock exchange to remain range-bound in the coming days.

TUR in Focus

The iShares MSCI Turkey ETF provides a pure play exposure to 50 Turkish stocks. The fund is highly concentrated on its top 10 holdings which make up for nearly 60% of assets. Industrials dominates the fund’s returns with about 26.95% of the portfolio while materials, consumer staples and financials take double-digit exposure in the basket. iShares MSCI Turkey ETF charges 57 bps in annual fees from investors and yields 2.13% annually.

 


 


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