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Turkey ETF Beats S&P 500 in the Past Month: Here's How

Sanghamitra Saha

Turkey has been on the headlines for back-to-back massive rate cuts. Turkey’s central bank governor Murat Uysal lowered the key rate to 16.5% from 19.75% on Sep 12. Before this, Turkey’s central bank slashed the key interest rates from 24% to 19.75% in late July (read: Top ETF Stories of July).

The Monetary Policy Committee said inflation is likely to close the year 2019 below the earlier forecasts. At the same time, Turkey indicated less scope for deeper easing ahead (read: Massive Rate Cut Puts Spotlight on Turkey ETF).

Overall, Turkey ETF iShares MSCI Turkey ETF TUR added 5.5% in the past month (as of Sep 16, 2019) versus a 2.5% advancement in the S&P 500.

Turkey's annual inflation dropped to 15.01% in August, marking an improvement from 16.65% recorded in July and expectations of 15.60%. In July, Turkey's Central Bank lowered its year-end inflation forecast for 2019 to 13.9% from 14.6% in its previous report.

The inflation rate is expected to move within the range of 11.5% to 16.3% through the end of this year, the bank's governor, Murat Uysal, said. “The country's inflation rate target is 15.9% this year, 9.8% next year, and 6.0% in 2021, under the new economic program announced last September,” as quoted on the source.

Also, major central banks of the world have resorted to rate cuts of late. Such accommodation has supported the lira and helped facilitate Turkish rate cuts. It is widely believed that the rate cuts will help Turkey recover from recession and bring down its elevated unemployment rate. The Turkish economy shrank 1.5% year over year in the second quarter, better than expectations, and “recorded another positive quarter-on-quarter reading as it looks to shake off the effects of recession after last year's currency crisis.”

Consumption in the second quarter came in at stronger-than-expected (probably by lower rates) and net exports (helped by the weak lira) went a long way in limiting the annual GDP shrinkage. This suggests that the recovery has taken root.

Relation Between Interest Rate & Turkish GDP: Past Trend

Per a source, Turkey’s interest rate was at the range of 4 to 10% from 2010 to 2018. In 2018, interest rates were increased to beat inflation. Inflation rose to nearly 25% in late 2018. As a result, interest rate touched a high of 24% in early 2019.

Due to the sky-high interest rates, the Turkish GDP growth contracted and slipped to a low of negative 3.2% in the first quarter of 2019. Otherwise, Turkish GDP annual growth remained in the range of 3-12% from 2010 to 2018. So, we can expect the latest rate cuts and cooling inflation to add to decent growth, going forward.

ETF in Focus

Against the backdrop, we would like to draw investors’ attention to the Turkey ETF.

TUR in Focus 

The fund seeks to deliver investment results that replicate the price and yield performance of the MSCI Turkey IMI 25/50 Index which is composed of Turkish equities. With AUM of $338.7 million, the fund has 47 holdings. It has an expense ratio of 0.59% (read: US Tightens Sanctions on Iran: Country ETFs to Gain/Suffer).

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iShares MSCI Turkey ETF (TUR): ETF Research Reports
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