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Turkey ETF Tumbles on Surprise Rate Hike

Eric Dutram

A rough stretch for emerging markets is apparently continuing in the tail end of August, as a number of large developing nations are tumbling once more. While the trend has been especially severe in nations like India and Indonesia, it appears as though weakness is now spreading to the market of Turkey as well.

Turkey has already had a rough summer thanks to a series of protests that escalated after a planned development in Istanbul. The demonstrations then spiraled into broad displeasure with current PM Recep Tayyip Erdogan, and his conservative rule (read Turkey ETF Crashes After Istanbul Protests).

The unrest helped to cause fresh losses in both the currency and the nation’s stock markets, and sent many investors looking for lower risk destinations instead. And with worries over current accounts and currency reserves, there was some fear that this trend could continue throughout the summer as well.

While Turkey did consolidate a bit during July and then briefly to start August, the next leg down could be at hand for the nation. This is because the lira was trading at fresh lows against the euro, forcing the central bank to act.

Surprise central bank move

The country’s central bank surprised the markets with a 50 basis point hike in rates for its benchmark figure. Many believed that the bank was going to stay firm in this latest meeting, but a combination of the struggling lira and broad emerging market currency weakness probably compelled action (see Turkey ETF Continues to Struggle as Currency Tumbles).

Still, the move is somewhat surprising given how anti-rate hike the Turkish PM was very recently. While Erdogan doesn’t control the bank, the central bank only raised rates last month after a ministerial summit headed by the PM, according to the Financial Times.

Given this, it is somewhat shocking that the central bank went ahead with another rate hike, especially with growth rates where they are. GDP growth has actually slowed from 8% in 2011 to an expected rate of just 3% this year, so clearly concerns over inflation and currency stability are front and center for policymakers now.

Market Impact

As you can imagine, this rate hike did help to boost the Turkish lira, helping to stabilize the currency. However, the move did cause a further slump in Turkish equities, pushing these securities to fresh lows following the interest rate decision (also see Indonesia ETFs in Crash Territory).

In fact, the main way for U.S. investors to target the Turkish market in diversified form, the iShares MSCI Turkey ETF (TUR), plunged on the day by roughly 4.0%. The move came on high volume too, with more shares moving hands in the first three hours of trading than in an entire normal session.

While the slump is obviously bad news, it is even more troubling when you consider that TUR is floating just above 52-week lows. In other words, the protests and the ensuring unrest didn’t bring the Turkish market to as great of a depth as the recent rate hike and broad emerging market woes have.

Bottom Line

Worst of all, the fund’s breakdown suggests that more losses could be in the cards if these kind of trends continue. Roughly half the portfolio is devoted to financials, suggesting that any news about currencies will have a big impact on the fund (see 3 Top Ranked Financial ETFs to Buy Now).

While it is true that there is solid exposure to sectors that might do alright regardless of this environment, such as industrials (14.5%) or materials (7.1%), or relatively low beta sectors like staples and telecoms (combine to make up 20% of assets), it is clear that they aren’t enough to break the overall trend lower.

Given this, it might be worth it to stay away from the Turkey ETF for the time being. The ETF currently has a Zacks ETF Rank of 3 or ‘Hold’ so there are plenty of other options out there. In the broad European sphere, both ADRU and FEU receive Ranks of 2 (Buy), and may be better options while Turkey tries to get its act together and avoid the whirlpool that has dragged down so many other emerging markets lately.

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