This Emerging Market ETF Breezed Past S&P 500 in 2022
The year so far has been caught up with high inflationary pressure across the world due to supply-chain issues, the Russia-Ukraine war, high energy prices, a commodity super-cycle, a super-hawkish Fed, rising rates across the globe as central banks have been tightening policies to rein in inflation, risk-off trade sentiments and a global market crash. The S&P 500 is off 22.5% so far this year (as of Sep 23, 2022).
The Fed started rate hikes this year and had enacted a 300-bp rise so far this year, which actually caused recessionary fears. The broader emerging markets were hurt badly mainly due to pain in Chinese equities. A stronger greenback also hurt emerging market ETFs. Most emerging economies’ currencies have been falling to multi-year lows against the greenback. Dollar strength also tightened EMs’ ability to obtain credit.
Against this backdrop, Turkey ETF iShares MSCI Turkey ETF TUR (up 25.5%) breezed past the S&P 500 this year. The fund even added 5.5% past month against a 9.2% decline in the S&P 500. Let’s delve a little deeper.
Turkey ETF in Focus
The underlying MSCI Turkey IMI 25/50 Index is a free float-adjusted market capitalization index designed to measure broad-based equity market performance in Turkey. The Index consists of stocks traded primarily on the Istanbul Stock Exchange. The fund charges 57 bps in fees and yields 2.57% annually.
Why the Move?
The Borsa Istanbul 100 index hit a fresh record past month as investors continued to use equities as a hedge for surging prices and a falling lira. The central bank has been cutting rates continuously despite red-hot inflation. The country’s monetary policymakers opted for a 100-basis point cut last week, bringing the key one-week repo rate from 13% to 12%.
Previously, the central bank unexpectedly slashed its key rate by 100bps to 13% in its August meeting, adding to the 600 bps reduction of the key rate since September 2021, per tradingeconomics. This has bolstered the equity market.
Can the Rally Sustain?
The rally is less likely to sustain as profit taking in banking shares already caused a slump in the market last week. Banks traded in Istanbul have seen continued growth since Q3 of 2021, per tradingeconomics. But sustained rate cuts no longer be favorable for bank stocks.
The lira nosedived over 50% since September 2021 and annual inflation in Turkey soared past 80% in August, the highest in nearly 24 years. This has caused negative real rates. Many economists predict a further decline in the lira. London-based Capital Economics sees it falling to 24 against the greenback by March 2023, as quoted on a CNBC article.
“Room for further easing is becoming increasingly limited because of the pressure this is putting on the lira and real rates,” Liam Peach, the firm’s senior emerging markets economist, told CNBC. “Turkey is running such a large current account deficit, and it has become dependent on inflows of foreign capital to finance that. FX reserves in Turkey are so low that the central bank is really in no position to step in,” he said, as quoted on CNBC.
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iShares MSCI Turkey ETF (TUR): ETF Research Reports
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