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More Trouble For The Turkey ETF

ETF Professor

Friday is the last trading day of August, and the end of the month could not come sooner for the iShares MSCI Turkey ETF (NASDAQ: TUR). All the lone exchange traded fund tracking Turkish stocks has done this month is tumble, to the tune of 27.15 percent.

Even with its miserable August performance, TUR likely faces more trouble as pressure mounts on Turkey's embattled banks.

What Happened

Turkey's lira is one of this year's worst-performing emerging market currencies, a slide that exacerbated TUR's August woes in part because the fund does not hedge currency risk. The slumping currency is weighing on Turkish financial services institutions.

“The sharp fall in the Turkish lira this month heightens risks for Turkey's banks, and a marked reduction in banks' ability to refinance, protracted large deposit outflows or significantly deteriorating asset quality could lead to further negative rating actions,” Fitch Ratings said in a recent note.

Some ratings agencies recently pared their ratings on Turkish sovereign debt, sending the country's credit rating deeper into junk territory.

Why It's Important

Deterioration in the health of Turkish banks is relevant to TUR because financial services is the ETF's largest sector allocation at over a quarter of the fund's weight.

“State-owned banks could face negative rating pressure if stress on Turkey's external finances weakens the government's ability to provide foreign-currency support, and support-driven ratings of foreign-owned banks are sensitive to further sovereign downgrades or a reduction in their parents' propensity to provide support,” according to Fitch. 

TUR targets the MSCI Turkey Investable Market Index and holds 62 stocks.

What's Next

Turkey is viewed as one of the emerging markets most vulnerable to higher U.S. interest rates, and financial assets there are unlikely to get any help from the Federal Reserve anytime soon, with two more rate hikes expected this year. 

“The lira has since fallen a further 25 percent against the U.S. dollar and the authorities' limited policy response seems unlikely to sustainably stabilize the currency and economy,” said Fitch.

“With rising U.S. interest rates (we expect several more hikes in 2018-2019), Turkey faces a challenging financing environment given its large current account deficit, high foreign currency debt and high inflation, exacerbated by deterioration in its economic policymaking credibility and its worsening political relationship with the U.S.”

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