It has been another brutal year for investors in the iShares MSCI Turkey ETF (NASDAQ: TUR). The lone exchange traded fund in the U.S. dedicated to Turkish equities is down more than 17 percent year to date while the MSCI Emerging Markets Index is up by 2.18 percent.
TUR is lower by more than 13 percent just this month and some market observers are concerned more pressure could be coming on the often embattled Turkish lira, which has historically spelled trouble for TUR and Turkish stocks.
“The Turkish lira is on the verge of a crisis that would surpass what was experienced in August-September 2018,” said IHS Markit in a recent note. “In the first two months of 2019, official data showed that some calm had returned to Turkish markets.”
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TUR is being stung by, among other factors, dwindling foreign currency reserves, which makes the Turkish economy all the more vulnerable to a slumping lira.
“One notable economic vulnerability is the country's foreign currency reserves,” according to IHS Markit. “Official data showed that, at end-March, total foreign currency reserves were as high as they had been since 2017 as measured by months of imports covered. Even when we factor out those reserves held at the central bank that actually belong to commercial banks because of reserve requirement ratios, import coverage was notably stronger in 2019 than it had been in well over a year.”
Home to almost $330 million in assets under management, TUR is a volatile specimen among emerging markets single-country ETFs. The fund has a three-year standard deviation of almost 34 percent, more than double the comparable metric on the MSCI Emerging Markets Index.
In terms of what's next for TUR, should another lira crisis come to pass, it's a safe bet Turkish stocks and TUR will suffer the consequences.
“Lira instability is not over,” said Markit. “Prominently, the potential imposition of US sanctions on Turkey regarding the purchase of the Russian missile defense units could trigger a steep fall, particularly against a backdrop of increasing questions about the integrity of the TCMB. Already, the lira was trading at around where it had been trading during the August-September crisis.
"Baseline expectations are that the lira will continue to depreciate strongly moving forward, but somehow Turkey avoids sanctions and a crash is avoided. The risk of a crash is high, however, particularly if indeed Turkey sticks by its intentions to purchase the Russian defense system, triggering US sanctions. This lira crash would likely be more severe than what was noted in August 2018.”
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