Turkish equity exchange-traded funds have undergone increased volatility in the second half of the year as the Turkish lira has plummeted in value, the economy has suffered the first year-on-year contraction since 2009, and the government fended off a military coup over the summer.
Turkish President Tayyip Erdogan (R), speaking after the failed military coup in July 2016.
In response to the attempt to topple Recep Tayyip Erdogan from power, the Turkish president arrested more than 100,000 civil servants and imposed a ban on lawyers, teachers and lecturers from traveling abroad. Tourism has also suffered in Turkey due to repeated bomb attacks from terrorists. The latest blast last weekend in the centre of Istanbul killed 44 people.
The result is that Turkey’s economy shrank in the third quarter by 1.8% – a sharper fall than had been expected – and a sharp turnaround for what was one of the best emerging market performers.
“The data confirmed that July’s coup attempt took a heavy toll on the economy,” said William Jackson at Capital Economics.
The lira has fallen about 20% versus the US dollar in 2016, and it plummeted a further 1.8% after the growth figures were released.
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To stem the fall, Erdogan pushed businesses to sell their foreign currency reserves but the GDP numbers all but erased those gains. Turkey has more than $200bn in foreign currency, which makes it vulnerable as the lira falls.
Deputy prime minister Mehmet Simsek blamed weaker global trade and outflows from emerging markets as contributors to the economic contraction.
Emerging markets ETFs saw global outflows of $3.2bn in November, as reported by BlackRock. The move reflects investors racing to protect their portfolios from rising interest rates in the US, slowing growth in China and the possibility that US President-elect Donald Trump would seek to rewrite existing international trade deals.
The Turkish Borsa Istanbul 100 Index has had a choppy year. It rose more than 18% from the start of the year to late April, but started to slide after terror attacks in March in Brussels and the US indictment of a Turkish national who was involved in a corruption scandal two years prior. Prime Minister Ahmet Davutoglu resigned in May, exacerbating fears about the country becoming more authoritarian. After the failed coup, the index plummeted by 13.3% in seven days until 22 July.
The index is still up 6.2% year to date, however, due to strong gains in the first few months of the year. It has posted minimal gains of 0.28% over the last three months.
European listed ETFs tracking Turkey have not fared as well though due to the sharp fall in the lira relative to major trading currencies. In Europe, there are two ETFs that track the MSCI Turkey Index, and both are down more than 10%.
The $5.7m HSBC MSCI Turkey UCITS ETF (LON: HTRY) has fallen 10.4% in three months in GBP terms. It costs 0.60% and is the cheapest London-listed ETF tracking Turkey.
The $116.7m iShares MSCI Turkey UCITS ETF (LON: ITKY) is also down 10.4% over three months in GBP terms. It costs 0.74%. The USD-listed version (ticker IDTK) is down 14.7% over three months.
Both (GBP share class) funds are in the black year to date, however, at around 4%.
The MSCI Index has 43.7% in financials, 13.8% in consumer staples and 10.8% in industrials.
The third option on a different index is the Lyxor UCITS ETF Turkey DJ Turkey Titans 20 (LON: TURL), which is down 8.8% over three months in GBP terms, but it is up 6.8% year to date.
The underlying Dow Jones Turkey Titans 20 Index measures the performance of 20 Turkish companies whose capitalization and liquidity are considered most important. Each component’s weight is capped at 10%. The index has 46.8% in financials, 15.4% in oil and gas and 10.9% in consumer services.
TURL costs 0.65%.
Political volatility is set to continue. Erdogan has unveiled a draft constitution, which must be approved via a referendum. The result of that referendum will partially depend on whether the Turkish people believe he can deliver the economic prosperity they enjoyed when he was prime minister between 2003 and 2014.
For investors seeking exposure to Turkey within a more diversified wrapper, the $76m db X-trackers MSCI EM EMEA Index UCITS ETF (LON: XMXD) tracks 164 companies and holds 6.7% in Turkey. Its top country exposures are 41.2% in South Africa, 25.7% in Russia and 6.7% in Poland. The fund is up almost 17% year to date in USD terms.