The Ishares Msci Turkey Inv Market Index Fd (NYSE:TUR) fell almost 3 percent Thursday, bringing the five-day loss for the only exchange-traded fund dedicated to Turkish equities to almost 18 percent.
Since last Friday's failed coup attempt against President Recep Tayyip Erdoan, TUR has been getting punished and that punishment is arriving on consistently high volume. Thursday's decline saw 1.77 million shares of TUR change hands, more than triple the three-month daily average.
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Predictably, ratings agencies are expressing caution, to say the least, on Turkey. Early this week, Moody's Investor's Service lowered its outlook on Turkish sovereign debt to negative, while putting the country on review for a possible downgrade to junk status. Moody's currently rates Turkish sovereign debt one notch above junk.
On Thursday, S&P Global Ratings trimmed Turkeys credit rating to BB, two levels below investment grade, with a negative outlook. Turkey has long had a troubled relationship with Standard & Poor's and Thursday's ratings cut is not going to do anything to repair that relationship.
Political Volatility And Investor Sentiment
Global investors are also concerned about how the political volatility in Turkey will affect the country's banks. That is of particular concern for TUR investors, because the ETF devotes over 43 percent of its weight to financial services, more than triple its weight to consumer staples, TUR's second-largest sector allocation.
Downside risks for Turkish banks' credit profiles and ratings have increased as a result of the country's attempted military coup and the greater political polarisation that appears to be following in its aftermath, Fitch Ratings says. Turkish banks' credit profiles are sensitive to country risks, access to foreign credit markets and the lira exchange rate, said Fitch Ratings in a recent note.
That is an added element of volatility for an ETF that does not need it. TUR's three-year standard deviation is 29 percent, putting it on par with Russia ETFs, and making the fund much more volatile than diversified emerging markets ETFs.
It's Not All Terrible For Turkey
Fortunately, Turkish bank fundamentals remain solid.
At the same time, we continue to view the Turkish banking sector as fundamentally sound, as reflected in the investment-grade ratings of most large lenders, and do not expect any sharp movements in banks' financial metrics in the near term. There has been little evidence of deposit instability triggered by the attempted coup, and the central bank has indicated its readiness to provide liquidity support to the sector, added Fitch.
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