Turkey ETF Hot This Thanksgiving: Will The Rally Last?

While setting the table for a Thanksgiving dinner, most attention probably goes to the roasted Turkey.

But apart from the bird, another Turkey has been hogging investors’ attention this Thanksgiving. Yes, we’re talking about the country.

The country’s investment scenario has improved as the pure-play iShares MSCI Turkey ETF (MC:TUR) added about 5.5% in the past month (as of Nov 25, 2019), breezing past 3.1% gain recorded by the S&P 500. In the past six months, the Turkey ETF jumped 24.6% against 11.8% gains in the key U.S. equity gauge (read: Beyond US, These Foreign ETFs Are At Highs).

Inside the Rally

Turkey has been on the headlines for back-to-back massive rate cuts. The country’s central bank lowered the key rate to 14% from 16.5% in its October meeting, more than market expectations of a 100-basis point (bp) cut. This follows a 325-bp rate cut in September. 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).

Inflation outlook continues to improve amid a moderate recovery in economic activity. Turkey’s inflation rate dropped to its lowest level in almost three years in October, which is facilitating the central bank to go for such steep rate cuts. Consumer inflation cooled to 8.6% in October from 25.2% in the prior-year month.

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 (read: Global Policy Easing Cycle Set in Motion: ETFs to Win).

Notably, the Turkish economy contracted 1.5% year over year in the second quarter of 2019, easing from a downwardly revised 2.4% shrinkage in the previous three-month period and compared with market expectations of a 2% decline.

Relation Between Interest Rate & Turkish GDP: Past Trend

Per a source, Turkey’s interest rate was in 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 sky-high interest rates, 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.

Also, a decline in oil prices in the past six months and moderate gains in the U.S. dollar supported the Turkey ETF. Turkey’s 90% crude requirements are met by imports. Movements in oil price and greenback helped the Turkish market to a great extent.

Will the Rally Break Down Ahead?

Things from here do not look promising. Inflation is expected to shoot up again in the end of 2019, with Turkey’s central bank forecasting year-end inflation of 12% — far above its official target of 5%. With this, room for further rate cuts shrink (see all European Equity ETFs here).

ETF in Focus

The fund seeks to deliver investment results that replicate the price and yield performance of the MSCI Turkey IMI (LON:IMI) 25/50 Index which is composed of Turkish equities. With AUM of $374.5 million, the fund has about 50 holdings. It has an expense ratio of 0.59%. The fund has a Zacks Rank #5 (Strong Sell).

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