Turkey ETFs volatile as Erdoğan gains power following failed military coup

Jul 28th, 2016 | By | Category: Equities

The failed military coup in Turkey sent exchange-traded funds into a downward spiral in July, with the Turkish equity index taking an overall hit of more than 13% over the last three months in sterling terms.

Zyfin launch first European-listed Turkish bond ETF

Turkey ETFs fall as Ergodan gains power following failed military coup

On Friday 15 July, President Recep Tayyip Erdoğan struck back against the attempted military uprising, urging citizens – via FaceTime – to take to the streets in protest.

Within hours he had declared victory for political Islam, stating: “We only bow to God”. By this point around 290 people were dead, more than 1,400 were injured and 6,000 were in prison. The government has since suspended around thousands of teachers, lawyers and judges – anyone they suspect to be a potential dissident.

During the six days after the failed coup, the iShares MSCI Turkey UCITS ETF (ITKY) fell more than 18% in sterling terms.

Despite the political upheaval and the ensuing violence, the president has consolidated power in the country as most Turks perceived the military coup to be undemocratic. ITKY rebounded 4.6% over four days to 25 June.

ITKY is up 13.4% year to date, but has lost the same amount over the past three months. Volatility has not been helped by the fact that over 45% of the underlying index is exposed to financials – an inherently turbulent sector.

During times of instability, including a series of terrorist attacks, foreign direct investment in Turkey has dropped from $22bnin 2007 to $16bn in 2016, according to data from Trading Economics. Assets in European-based Turkish ETFs are also relatively low, totalling just £173m across three funds from iShares, Lyxor and HSBC.

Turkey as a single country ETF is still is rather a nice strategy, therefore ETF fees have not come down anywhere as low as other equity markets. The three Turkish ETFs domiciled in Europe offer annual fees of between 0.60% and 0.74%. iShares has the most assets at £9m, which will boost potential liquidity compared to its competitors, but it also charges the highest fee at 0.74%.

A broader strategy to gain access to Turkey in a diversified index is to invest in overall emerging markets. Turkey makes up just 1.13% of the MSCI Emerging Markets Index, alongside 22 other countries. The iShares MSCI Emerging Markets UCITS ETF (IEEM) is up over 25% year to date. (This fund comes with a high price tag of 0.75%). The cheaper iShares Core MSCI Emerging Markets IMI UCITS ETF (EIMI) only costs 0.25% but is up slightly less year to date at 24.6%.

The outlook for Turkey and the ETFs tracking it is uncertain. The consolidation of the president’s power could weaken ties between his military and that of other countries, making it easier for Isis to strike again, which would lead to further instability in the region, as reported by CNN.

One sector that could benefit from Erdoğan’s renewed relationship with Russia, however, is energy. A potential renewal of the Turkstream pipeline project would import more gas from Russia into Turkey. Energy makes up around 5% of the MSCI Turkey Index.

Erdoğan has also renewed diplomatic ties with Israel after a six-year stalemate.

“Erdoğan’s version of realpolitik will allow him to rebuild relationships around the world, even reaching Europe and the US if he so chooses. But it will most likely not, in the end, lead to a more stable or trustworthy economy,” wrote analyst Jonathan Hoogendoorn for Global Risk Insights.

Erdoğan once famously said that democracy “is like a tram” – he rides it until he arrives at his destination, then he steps off. It seems that, after the coup, his destination is on the horizon.

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