The victory of Recep Erdogan in the recently concluded election has challenged the democratic credentials of Turkey and fears of a complete authoritarian takeover are looming large in the economy. The financial markets went into a tailspin, with iShares MSCI Turkey ETF (TUR - Free Report) slumping to a nine-year low, losing 2.7% on Jun 25. Turkish lira climbed 3% on the same day (read: 5 ETF Ways to Hedge Stock Market Volatility).
Turkey: Crisis Explained
In order to save democracy under an increasingly dictatorial president, the Turkish military tried to overthrow the government, in a failed coup attempt in 2016. This resulted in a massive crackdown by the Erdogan government, which led to the arrest of 160,000 people consisting of soldiers, civil servants, teachers and journalists. Political opponents were silenced and suppression of free speech along with mass arrests that continue even today without much accountability.
In April 2017, the government was victorious in a constitutional referendum, which changed the parliamentary system of Turkey to an executive presidency. The post of Prime Minister has been done away with and will be replaced by one or more vice-presidents.
Elections and Controversy
Elections in Turkey were originally scheduled on Nov 3, 2019. On account of state of emergency with a continuous declining lira and increasing involvement in the Syrian War, Erdogan advanced it to Jun 24 this year.
In Jun 24 elections, after counting 97.7% of the votes the electoral board announced Erdogan, from the Justice and Development Party (AKP), winner with a clear majority of 52.5% vote. His challenger Muharrem Ince of the Republican People's Party (CHP) managed only 30.6% of the votes.
How is the Financial Market Affected?
Erdogan gaining unlimited power is feared to be influencing the Central Bank governor into lowering interest rates. In a country plagued by double-digit inflation and increasing current account deficit, this seems a risky bet for most investors and analysts.
Most foreign investors are taking a wait-and-see approach, till the Turkish president announces his economic policies. Although Turkey clocked a 7.4% GDP growth rate in 2017, the fundamentals of the country are vulnerable.
Corporate debt has reached 70% of the economy and foreign currencies control half of that ($337 billion). The lira has declined 16% this year, indicating that the private sector will be in a difficult position to pay off the foreign debts it has accumulated.
The market is also concerned about the Turkish economy where inflation touched 12.15% in May. Interest rate has touched 17.75% in Turkey, which has drastically reduced the scope of borrowing cheap loans and infrastructure developments (read: Time to Buy Defensive ETFs?).
Foreign investors holding around 64% of the listed equity are on a selling spree for four months in a row, per the Institute of International Finance fund flow data.
As investors remain jittery amid uncertainty in Turkey, let us focus on the movement of a Turkish ETF that has been affected.
TUR in Focus
iShares MSCI Turkey ETF (TUR - Free Report) , has exposure to a broad range of Turkish stocks and tracks the investment results of the MSCI Turkey Investable Market Index. The fund has 62 holdings in its basket with an average daily volume of 415,500 shares. As for individual stocks, none holds more than 9%. As for the industry outlook, Financials is the leading sector with a 31.3% weight. Industrials, Materials and Consumer Surplus make up the next three allocations with 19.5%, 13.7% and 12.2% weights in this fund, respectively. The fund has lost 12.7% in the past month. It has an annual expense of 62 basis points and a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook (read: Should These 3 Emerging Country ETFs Fear Fed Rate Hikes?).
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