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Issues Continue to Mount For Turkey ETF

This article was originally published on ETFTrends.com.

The iShares MSCI Turkey ETF (TUR) has been one of this year's most controversial and volatile single-country emerging markets exchange traded funds.

While off its lowest levels of the year thanks in large part to a fourth-quarter gain of 21.53%, only US-listed ETF dedicated to Turkish equities is still down more than 43% year-to-date. TUR's fourth-quarter performance is impressive, but that does not mean skies are completely clear for Turkish stocks.

“The country’s fifth-largest lender by assets, Akbank, has launched a deeply discounted rights issue to shore up its balance sheet,” reports Reuters. “An ongoing economic slowdown makes that a wise move. A cocktail of rising bad debts, higher funding costs and liability mismatches means lenders face more financial pain in the year ahead.”

TUR, which labors 47% below its 52-week high, allocates 26.53% of its weight to financial services stocks, the fund's largest sector weight. Akbank is TUR's fourth-largest holding at a weight of 7.40%.

Turkey’s central bank has even hiked interest rates 6.25 percentage points to fight the rising inflation and support the weakening lira currency. The Turkish government has also implemented a new economic program with lower growth targets as a response to the current market environment.

“Fitch Ratings has downgraded the Long-Term Foreign-Currency Issuer Default Ratings (LTFC IDRs) of 20 Turkish banks and their subsidiaries. The agency has also downgraded the Viability Ratings (VRs) of 12 banks,” said Fitch Ratings in a recent note.

Still Profitable

Amid a challenging environment, Turkish banks are remaining profitable.

“Despite the economic and market turmoil that engulfed Turkey earlier this year, its banks’ profitability has mostly held up,” according to Reuters. “Returns on equity at Akbank, Yapi Kredi, which is co-owned by Italy’s UniCredit, and Garanti, owned by Spain’s BBVA, average around 15 percent. But the situation is likely to deteriorate.”

Garanti is TUR's largest holding at a weight of almost 9%. Data indicate Turkish banks are cheap, but that does not guarantee significant upside over the near-term.

“After price declines of between 22 percent and 41 percent this year, shares in Akbank, Garanti and Yapi Kredi trade below their estimated tangible book value, according to Refinitiv data. Superficially, that looks too low for banks making double-digit returns. But, as Akbank’s rights issue indicates, investors’ concerns are probably justified,” according to Reuters.

For more information on the Turkish markets, visit our Turkey category.