Rolle im Portfolio
The iShares MSCI Turkey provides equity exposure to Turkey, the largest economy in emerging Europe. As is the case with all ETFs offering single country emerging market equity exposure, the iShares ETF is best deployed as tactical tool within a well diversified portfolio. The ETF can also be deployed as a core holding complementing exposure to emerging markets in Asia and Latin America. The index’s low to moderate correlations with international stock markets indicate that this fund could provide diversification benefits when added to an existing equity allocation. Over the last three years, The MSCI Turkey Index correlated 32% with the MSCI EM Asia Index and 29% with the MSCI World Index.
The ETF is also suitable for investors with a bullish view on the Turkish stock market. However investors should be aware that the MSCI Turkey Index is not the best proxy for the Turkish economy. The index is heavily biased towards financials (59%), whereas the sector represents less then 5% of GDP.
Before considering an investment, investors should review their portfolio for existing exposure to the Turkish stock market through other holdings to avoid unintentionally over weighting this region. For instance, Turkish equities represent around 10% of the MSCI EM EMEA Index.
Fundamentale Analyse
Structural reforms implemented during the last decade–a requisite of the stand-by agreement signed with the IMF in the early 2000s–set Turkey on a solid economic policy path, allowing it to rebound strongly from the global financial crisis. More recent rounds of reform and consolidation have focused on strengthening the banking sector. Growing confidence in the country’s economic prospects has led to strong growth in private sector credit to levels that could put smaller banks at risk if the recovery were to weaken. As a result, the Central Bank has intervened with the aim of curbing credit expansion by raising reserve requirements.
Turkey finds itself in a challenging position as it is located between a struggling Eurozone and a political turbulent Middle East. After four years of strong growth, the Turkish economy slowed down in 2012, with GDP growing by 2.2%, below the government’s 4% forecast. For 2013 the European Bank for Reconstruction and Development (EBRD) forecast GDP to expand by 3.7% as the economy is expected to benefit from loose monetary policy spurring domestic demand. The IMF has marginally lowered its growth forecast for Turkey to 3.4% from 3.5%.
As we write, investors are actively betting on Turkey securing a second investment grade rating. This could flood the domestic market with overseas money, as many asset managers can only invest in countries with at least two investment grade ratings from the three big rating agencies. After Fitch upgraded the country from “junk” to investment grade at the end of 2012, Moody’s and S&P increased their ratings this year to just one notch below investment grade, with S&P granting a stable outlook as the country slowly rebalances towards a more export orientated economy. Moreover, a recent deal with the country’s Kurds, representing about 20% of Turkey’s population, is seen as positive by the rating agencies as it frees up capital from security related expenditure while potentially improving the regional economy and cross-border trade flows.
Despite all these positives, Turkey has struggled to attract foreign investor’s capital for infrastructure projects, as it deals with a series of structural problems. The current account deficit continues to be a major challenge as the country heavily depends on energy imports. Aside from conditioning external financing needs, it makes domestic inflation heavily sensitive to oil and gas international price movements. The official inflation target for 2013 is 5.3%, but it was already running at 7.3% in March. Meanwhile, the current account deficit widened to 6.2% of GDP in February from 6% at end 2012, and most economists expect it to widen even further to 7.6% by year-end. Market participants argue that the country cannot sustain a deficit of more than 5% as it leaves the country vulnerable for external shocks.
In order to support growth, counter currency appreciation, and avert a too high increase in the current account deficit, the Central Bank recently cut its key interest rate from 5.5% to 5.0% - a record low. Still, the high interest rate differential to developed markets continues to attract carry trades. The Lira has appreciated over 18% versus the USD and 23% versus the Euro over the last three years.
Indexkonstruktion
The MSCI Turkey Index provides equity exposure to Turkey. Components must meet minimum criteria for liquidity, as well as foreign ownership restrictions. The securities are weighed by free-float adjusted market capitalisation. Because closely held firms will have a smaller piece of their aggregate market capitalisation floated on public exchanges, the free float adjustment serves to ensure the underlying liquidity of the holdings is superior relative to a pure market capitalisation weighting. The index is reviewed four times a year. As of this writing, there are 25 stocks in the index. The index is heavily top weighted as the top three holdings represent about 35% of its value. The financial sector, the most represented sector in the index, represents 59% of the index’s value, followed by consumer staples (12%) and industrials (10%).
Fondskonstruktion
iShares MSCI Turkey uses physical replication to track its reference index. The fund intends to invest in all of the constituents of the MSCI Turkey Index in the same weightings as in the index. iShares may engage in securities lending within this fund to generate additional revenues for the fund. The lending revenues generated from this activity are split 60/40 between the fund and the lending agent BlackRock, whereby BlackRock covers the costs involved. To protect the fund from a borrower’s default, BlackRock takes collateral greater than the loan value. Collateral levels vary from 102.5% to 112% of the value of securities on loan, depending on the assets provided by the borrower as collateral. Additional counterparty risk mitigation measures include borrower default indemnification. Specifically, BlackRock commits to replace the securities that a borrower would fail to return. The indemnification arrangement is subject to changes, and in some cases without notice. Finally, BackRock limits the amount of assets that can be lent out by this ETF at 50%.Cash received as dividends from the underlying stocks is held in the fund’s income account until it is distributed to fund holders. Distributions are made on a quarterly basis. This dividend treatment can potentially create a drag on returns in upward trending markets as dividends are not reinvested into the fund. In practice this cuts both ways. It could also result in outperformance if the benchmark falls in the interim period.
Gebühren
The fund levies a total expense ratio of 0.74%; the most expensive ETF tracking Turkish equities. Other potential costs associated with holding this fund which are not included in the TER include rebalancing costs, bid-ask spreads and brokerage fees.
Alternativen
As of writing, there are five other ETFs providing equity exposure to Turkey. The largest in terms of total assets under management is the Lyxor ETF DJ Turkey Titans 20. The ETF from Lyxor uses synthetic replication and offers very similar market exposure in terms of sector breakdown and number of holdings. The Lyxor fund levies a total expense ratio of 0.65%.
Investors preferring a more diversified approach to investing in the EMEA region might consider the db x-trackers MSCI EM EMEA ETF. This ETF uses synthetic replication to track an index that is biased towards South Africa (41%), followed by Russia (33%) and Turkey (13%). On a sector level, the MSCI EM EMEA Index is biased towards financials (32%) and energy (24%).
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