Turkey ETF Down Slightly After Fitch Investment-Grade Call


The iShares MSCI Turkey Investable Market Index Fund (NYSE:TUR) is off 0.13 percent to start this. That decline, albeit modest, might be a surprise to some investors following news that Fitch Ratings has upgraded Turkey's long-term foreign currency Issuer Default Rating (IDR) to BBB- from BB+ and the Long-term local currency IDR to BBB from BB. The outlooks on those ratings are stable.

Fitch also raised Turkey's short-term foreign currency IDR to F3 from B and the Country Ceiling to BBB from BBB-, the ratings agency said in a release published on Monday.

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"The upgrade to investment grade reflects a combination of an easing in near-term macro-financial risks as the economy heads for a soft landing and underlying credit strengths including a moderate and declining government debt burden, a sound banking system, favourable medium-term growth prospects and a relatively wealthy and diverse economy," Fitch said in the statement.

Investors have already sent TUR soaring by nearly 54 percent this year thanks to Turkey's alluring combination of favorable demographics, a strong currency and a shrinking deficit.

Still, the move to investment-grade territory is no small feat. Turkey last held such a rating 18 years ago. Now, the country needs either Moody's Investors Service or Standard & Poor's to join Fitch in viewing it as investment-grade so that Turkish bonds can be included in benchmark fixed income indexes, Reuters reported.

Even without the investment-grade rating, Turkish bonds are on prominent display in some emerging markets bond funds. The iShares J.P. Morgan USD Emerging Markets Bond Fund (NYSE:EMB) devotes almost 6.7 percent of its weight to Turkey while the rival PowerShares Emerging Markets Sovereign Debt Portfolio (NYSE:PCY) features Turkey as its largest country allocation with a weight of 4.75 percent.

Moody's upgraded Turkey's sovereign credit rating to Ba1 in June. That rating is slightly below investment-grade. S&P rates Turkey BB, the second-highest non-investment grade. However, S&P lowered its outlook on that rating to stable from positive in May, prompting Turkish officials to accuse the ratings agency of ideological bias in its ratings.

The lower outlook on Turkey's credit rating from S&P has been no deterrent to TUR. That downgrade happened on May 1 and since May 4, the $627.4 million ETF has gained nearly 24 percent. Fitch's comments on Turkey's banking system could prove bullish for TUR, which allocates more than 51 percent of its weight to financial services names.

"Turkey's sound banking system underpins the rating. It has a capital adequacy ratio of 16.3%, is moderate in size and has a low non-performing loan ratio of 2.8%. However, credit growth has been brisk in recent years (although it slowed to 14% in September 2012), raising the loan/deposit ratio to above 100%. Household debt is low at only 18% of GDP," Fitch said in the statement.

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