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Is Turkey's EU Hopes Over? ETF in Focus

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It’s not surprising that on Thanksgiving Day “Turkey” grabbed the headlines. Only, it was not the bird but the country. The European Parliament voted by 471 to 37 to temporarily halt talks on Turkey’s bid to join the European Union. Although the European parliament’s vote will not be binding, it sends a powerful message that could have serious political implications.

The overwhelming votes to freeze talks were largely due to Turkish government's stand on democratic rights and freedom, especially the failed coup in July to oust Turkish president Recep Tayyip Erdogan. The president planned a strict retaliation and more than 110,000 people were sacked or suspended and 36,000 arrested (read: Political Instability Puts Turkey ETF in Focus).

Turkey’s president has already dismissed the importance of the parliament’s vote, saying it has “no value”. Turkey's EU accession talks began more than a decade back. However, only one of the 35 chapters necessary to complete the negotiations has been closed. The country could see a referendum on its EU membership in 2017 similar to Brexit.

Such geopolitical tensions have a detrimental effect on currency and equities. However, it is not the only issue plaguing the investment case of Turkey. After Donald Trump’s win in the U.S. elections and the dollar hitting new highs, emerging markets like Turkey went into a tailspin (read: ETF Winners & Losers as Dollar Hits 13-Year High).

As a result, lira plunged to a record low, forcing the country’s central bank to raise its one-week repurchase by 50 basis points and overnight lending rates by 25 basis points for the first time in almost three years.

The pure-play Turkey ETF - iShares MSCI Turkey ETF (TUR - Free Report) lost about 13.9% in the last one month (as of November 23, 2016). The product provides exposure to Turkish equities and has an asset base of $307.1 million. The fund trades in good volumes of around 422,000 shares on an average, while charging 62 basis points as fees.

The fund provides concentrated exposure to a basket of 70 stocks. The top three holdings – Turkiye Garanti Bankasi A, Akbank A and Bim Birlesik Magazalar A – together occupy more than one-fourth of the total fund assets. Sector-wise, Financials dominates the product having 44.3% of the total fund exposure. Apart from this, Industrials (12.5%) and Consumer Staples (12.1%) have double-digit exposure.

TUR has a Zacks ETF Rank #5 with a ‘High’ risk outlook. We believe that the ETF might have a bumpy road over the medium term, unless some of the ongoing problems within the country are resolved (read: Has Turkey ETF Gone Sour this Thanksgiving?).

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