Timing The Turkey ETF Remains Tricky

The Ishares Msci Turkey Inv Market Index Fd (NYSE:TUR) has recently had a spotty record of outperforming the MSCI Emerging Markets Index. For the six years ended 2015, the iShares MSCI Turkey ETF outpaced the benchmark emerging markets gauge in just three years.

The lone Turkey ETF is off to a better start this year...sort of. TUR is off 4.5 percent, about half the loss incurred by the MSCI Emerging Markets Index. However, investors might want to curb their enthusiasm for Turkish stocks and TUR.

Along with South Africa, Turkey is widely seen as the next major emerging market to possibly be downgraded to a junk credit rating after Brazil suffered that fate in September at the hands of Standard & Poor's.

Under The Knife

In May, S&P downgraded its rating on Turkey's lira, one of this year's worst performing emerging markets currencies to "BBB-/A-3" from "BBB/A-2. At the time, the ratings agency said there is in a one-in-three chance it could downgrade Turkey's sovereign in six to 12 months.

Adding to the precarious state of investing in Turkey is a central bank that some analysts and investors view as a weak hand and one lacking credibility.

The delay to the Turkish central bank's road map for global monetary policy normalisation highlights the long-standing weakness of economic policy coherence and credibility, Fitch Ratings said. The Central Bank of the Republic of Turkey (CBRT) gave no indication of when it would begin its 'monetary policy simplification steps' when it announced the monetary policy committee's interest-rate decision on Tuesday. At its previous meeting on 22 December, the committee had indicated that these steps would begin in January, 'should the decline in volatility observed after the start of [...] normalisation persist.'

Fitch and S&P are not the only ratings to question the strength of Turkey's economy and the country's equity markets. In June, Moody's took the knife to its ratings on a batch of Turkish banks, which is bad for TUR, because the ETF allocates 43.6 percent of its weight to the financial services sector. That is more than triple the ETF's second-largest sector weight.

Monetary policy uncertainty comes at a time of rising inflationary pressures. Headline inflation hit 8.8% in December. Exchange-rate weakness will keep inflation above peers and it potentially jeopardises the target of 7.5 percent in the new government's medium-term programme, released on 11 January. We had assumed the CBRT would increase policy rates following the December Fed hike, but it left its three main interest rates unchanged on Tuesday, as it had in December, said Fitch.

A Glimmer Of Good News

If there is good news it is that plunging oil prices are eroding Turkey's current account deficit.

Over the 12 months to end-November, the CAD was USD34.7 billion, the lowest in over five years. Low oil prices will pull down the CAD on a rolling 12-month basis until mid-2016 at least, despite the impact of security incidents on tourism receipts and Russian sanctions, added Fitch.

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