What’s Crushing The Turkey ETF?

by on July 25, 2011 | ETFs Mentioned:

Concerns over growth and debt are ravaging many nations in both Europe and the Near East as the sovereign debt crisis continues to wreck havoc on the region. While the issues threaten to take down all of the PIIGS member nations, some emerging markets right outside the euro zone have proved incredibly resilient despite these concerns. One especially strong economy in the region is in Turkey where growth is abundant and the wind appears to be at the country’s back for the foreseeable future. However, storm clouds are beginning to appear in the short term as some are growing increasingly worried that Turkey’s growth train is very close to flying off the tracks.  

Turkey finds itself in an enviable position given the current strengths of its economy and workforce. The country remains at the crossroads of the Middle East and Europe and just as it has for centuries, Istanbul remains a vital stop on global trade routes. Additionally, Turkey has a solid demographic profile of young workers who are going to be hitting their peak earnings power in the years ahead, something that cannot be said for much of Europe. Furthermore, the country’s debt load, which is below 50% of GDP, is very manageable and is, once again, in sharp contrast to the highly indebted nations of Europe [ETF Insider: No Stopping Gold].

Despite these positives, many analysts are growing increasingly worried over the health of the Turkish economy. Growth, which came in at 11% last quarter, is the fastest of any major economy on Earth causing many to worry that the rapidly growing nation is quickly overheating and is headed for a hard landing. It also doesn’t help that the country is experiencing a large current accounts deficit which has ballooned to $37.3 billion through the first five months of the year, more than doubling the year ago period figures. “This is the Achilles heel of the Turkish economy. The problem is that there are no easy solutions. It’s a structural problem that can only be solved in time,” Yarkin Cebeci, chief economist for Turkey at JPMorgan Chase Bank, told The Media Line.

As might be expected, inflation is also becoming a major concern in the economy as well. Although inflation has declined to ‘just’ 6.2% in June, unemployment is rapidly falling. This is concerning because full employment tends to be inflationary, since there are fewer out-of-work job-seekers to keep wages down, thus pushing total labor costs up in the long term as corporations fight over increasingly scarce workers [Emerging Market Investing: Beyond The BRIC].

With the twin worries of inflation and unsustainable growth, many are starting to think that a significant rough patch is dead ahead for Turkey. As a result, the country’s stock markets have been selling off in recent weeks as investors search for safer markets and for nations less likely to overheat in the very near future. This is especially true when one looks at the main way to play the Turkish economy in ETF form with the iShares MSCI Turkey Investable Market Index Fund (TUR). The fund has seen heavy losses so far in 2011, having fallen close to 18.5% since the start of the year including a 22.5% loss in the past quarter alone. This has pushed the emerging market fund back down to the lowest level in more than a year and back below the $55/share mark [see charts of TUR here].

Whether this trend will continue is anyone’s guess but if history is a guide, we could see more volatility out of this popular ETF. The country’s economy doesn’t appear to be cooling off at all, and with the situation worsening in neighboring euro zone countries all the time, a hard landing is not out of the realm of possibility. Yet, on the other hand, Turkey still has a variety of positives that are unlikely to dissipate when the current crisis passes. Debt looks to remain low and the positives of a young national population look to remain for the foreseeable future as well. As a result, investors who are in it for the long haul may want to consider taking a closer look at TUR for investment [ETFs For The Next 11 Economies].

While the product could experience significant short term volatility, it is relatively popular with more than half a billion in assets and does volume of about 300,000 shares a day ensuring ample liquidity for even the biggest trades. The real concern should be in the holdings, as TUR tracks the MSCI Turkey Investable Market Index, which measures the performance of the Turkish equity market by investing in just over 100 companies in total. Financials dominate the holdings profile, as close to half of the assets are locked up in this sector, although industrials, consumer staples and telecommunications all make up at least 10% as well. Yet for those looking to make a play on Turkey, either by betting that the selling in this product will continue or by holding out for long term gains, TUR is really the only option out there.

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Disclosure: No positions at time of writing.