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Most-Hurt EM ETFs on Turkey Upheaval

Sanghamitra Saha
We remain cautious about the huge capital outlays, which might have dented Equinix's (EQIX) Sep-end quarter profitability, given a rise in interest rates.

The Turkish economy and currency are caught in a web of issues this year. So far, double-digit inflation, aftereffects of policy tightening in the United States, political woes and a complete authoritarian takeover of president Tayyip Erdogan and his influence over monetary policy have bothered the economy. Now, a diplomatic tussle with the United States dealt a blow to the economy.

President Donald Trump tweeted last week that he has doubled steel and aluminum tariffs against the country. Turkey is already facing U.S. sanctions for its arrest of “U.S. evangelical pastor Andrew Brunson, who is being held on espionage charges.”

In reply, Turkish president Recep Tayyip Erdogan adopted a non-conciliatory tone. Plus, Turkey has intensified its relationship with Russia and Iran at a time when both countries’ relationship with the United States is hostile. iShares MSCI Turkey ETF TUR was off 57.4% this year and the fund has lost about 24% in past two days (as of Aug 13, 2018)  (read: Why to Dump Russia ETFs Despite Higher Oil Prices).

Global Market Into a Tailspin With EMs Being Specially Squeezed

The issues sent Turkish lira in a free-fall territory since Aug 10. Though some central bank support is speculated, lira is still hovering around record low. The crisis in the currency makes it pricier for Turkish borrowers to pay back foreign-currency loans. With this, Turkey now appears more prone to default on its debt than Greece, per an article published on Bloomberg.

The issue had a spiraling effect onthe global market with emerging market (EM) currencies following the course of the lira’s downward spiral. There was lack of confidence in EM assets. The South African rand hit a low level not seen since mid-2016, the Russian ruble slumped again and the Indian rupee slid to an all-time trough. The MSCI Emerging Market Currency Index nosedived to its lowest in more than a year.

Though the Turkish turmoil has less to do with several Asian or Latin America EMs, one thing is for sure is that the deficit currencies such as the peso, rupee and the rupiah are more susceptible when risk-aversion grips market and capital flows get thwarted, per senior EM strategist at TD Securities, as quoted on Bloomberg. WisdomTree Emerging Currency Strategy ETF CEW has lost 3.1% in the past two days (as of Aug 13, 2018) (read: EM ETFs Rebound in July: Value Trap or Value Play?).

EM bonds also got thrashed, pushing yields up. A local-currency popular EM bond ETF dropped to its lowest level since its inception in 2010, per Financial Times (see all emerging market bond ETFs here).

Against this backdrop, below we highlight a few EM ETFs that were hard hit amid Turkey crisis.

Most-Hurt EM ETFs

iShares MSCI South Africa ETF EZA

The fund gives exposure to Johannesburg Stock Exchange. It has lost more than 9.5% in the past three days (as of Aug 13, 2018).

VanEck Vectors Russia ETF RSX

The underlying MVIS Russia Index includes companies that are incorporated in Russia or that generate at least 50% of their revenues in Russia. The fund has retreated 3.5% in the past three days (as of Aug 13, 2018).

Xtrackers FTSE Emerging Comprehensive Factor ETF DEMG

The underlying index of the fund looks to provide core exposure to emerging market equities based on five factors – Quality, Value, Momentum, Low Volatility and Size. China, Taiwan and South Africa are the top the countries of the fund. The fund has dropped 4.5% in the past three days (as of Aug 13, 2018).

Global X MSCI Greece ETF GREK

The fund is exposed to Greece andit has declined 6.2% in the past three days (as of Aug 13, 2018) (read: Is Taper Tantrum Back in 2018? EM ETFs in Focus).

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GLBL-X/F GREC20 (GREK): ETF Research Reports
 
ISHRS-MSCI TURK (TUR): ETF Research Reports
 
ISHARS-S AFRICA (EZA): ETF Research Reports
 
VANECK-RUSSIA (RSX): ETF Research Reports
 
DEUT-ZT FT EC F (DEMG): ETF Research Reports
 
WISDMTR-EMG CUR (CEW): ETF Research Reports
 
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