Turkey Election Results No Comfort for Turkish ETF (TUR)

Turkey’s ruling Prime Minister Recep Tayyip Erdogan has won a resounding victory in the recently concluded first direct presidential election, extending his 12-year hold on power. Erdogan secured 52% votes, easily beating his nearest rival Ekmeleddin Ihsanoglu, who had garnered 38.33% votes.

This win marks Erdogan's ninth consecutive election victory including referendums and municipal polls, showing just how popular he is as a ruler in Turkey, despite the recent troubles. Erdogan is believed to owe this landmark victory to the support of the conservative Muslims, most of whom have seen their annual income triple under his rule.

Markets Plunge

Despite the landslide victory, Turkey’s stock market plunged to a five-week low as investors feared that Erdogan’s win might lead to over-centralization of power and he might again put pressure on the central bank to lower interest rates at a time when the nation’s inflation rate is on the rise (read: Turkey ETF in Focus on Political Worries).

Despite a worsening inflation situation, the country’s central bank had lowered the benchmark interest rate for the third straight time to 8.25% last month.

Though the rate cut would definitely boost economic growth, it would make the nation more susceptible to external shocks. Deutsche Bank believes that the lack of credibility of the government coupled with a huge current account deficit (largely financed by short-term capital inflows) makes Turkey the most vulnerable among the emerging markets to another “taper tantrum”.

The Fed will be winding up its bond buying program this October and is expected to start raising interest rates next year after it was stalled in 2006. Most of the emerging market currencies took a beating last year on the commencement of taper talk. It is worth noting that the Turkish currency lira was one of the hardest hit plunging 18.6% in 2013.

With Erdogan in power, Fitch Ratings believes that "political risk will weigh on Turkey's ratings through its potential effects to discourage capital inflows and reduce policy predictability."

Given these concerns, Turkey's ISE National 100 index fell 2.4% on Monday to the lowest close since July 2, while the sole ETF focused on the nation iShares MSCI Turkey ETF (TUR) lost 3.2% on huge volumes (see all European Equity ETFs here).

Investors should keep a close eye on TUR for the next few days and avoid this ETF if it continues to plunge further. Below, we have highlighted some details about the fund for those curious about how to play the country in exchange-traded form:

TUR in Focus

TUR tracks the MSCI Turkey Investable Market Index to provide exposure to Turkish equities having an asset base of $513.7 million. The fund trades in good volumes of more than 300,000 shares a day, while charging 61 basis points as fees (read: Can the Turkey ETF Make New 2014 Highs?).

The fund provides concentrated exposure to a basket of 89 stocks. The top three holdings – Turkiye Garanti Bankasi, Akbank and Turkcell Iletisim Hizmetleri – together occupy one-fourth of total fund assets.

Sector-wise, Financials dominates the product having a little less than half of the total fund exposure. Apart from this, Consumer Staples (13.8%) and Industrials (12.5%) are the two other sectors with double-digit exposure.

The fund has gained roughly 19% in the year-to-date frame on the back of election euphoria and market-friendly measures. However, most of the gains have been erased recently, with TUR down more than 7% in the past two weeks alone (read: Best and Worst ETFs of July: Emerging Markets Soar, Commodities Fall)

We have a Zacks ETF Rank #5 or Strong Sell Rating with a “High” risk outlook on this fund and believe that the ETF might have a bumpy road over the long run, unless some of the structural problems within the country are resolved.

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