Can Turkey ETF Survive Political Woes?
Zacks Investment Research | Mar 10, 2015 01:32AM ET
iShares MSCI Turkey ETF (ARCA:TUR) – the sole ETF focusing on Turkey – saw a terrible start to the year and is in fact the worst performing ETF in the emerging equities space this year. TUR has plunged roughly 17% this year as against flat returns by the broad emerging market funds like Vanguard FTSE Emerging Markets ETF (ARCA:VWO).
Moreover, the Turkish lira has been one of the weakest performing emerging market currencies this year – having plunged roughly 10% against the dollar. Despite the weakening lira, Turkey’s central bank chief, Erdem Basci, is facing escalating pressure from the country’s government to aggressively lower interest rates to promote economic growth ahead of the June parliamentary elections.
The political pressure has been so intense that President Recep Tayyip Erdogan has said that it would be treason if the central bank chief fails to lower the high interest rates. Turkey’s central bank has already made two larger-than-expected rate cuts in the benchmark one-week repo rate since December to 7.5% from 8.25%.
The lack of credibility of the Turkish central bank to act independently seems to be one of the primary factors behind foreign money leaving Turkey, pushing the lira to fresh lows. Fears are widespread among investors that the central bank might give in to governmental pressures at a time when inflation remains above the official target. Moreover, expectations that the U.S. Federal Reserve may soon raise interest rates is also playing foul, leading to capital outflow from the developing markets.
Consumer prices rose 7.55% from 7.24% on an annual basis in January, with annual core inflation witnessing a declining trend, having fallen to 7.73% from 8.63% a month earlier. Nonetheless, economists believe that the central bank is unlikely to make deep interest rate cuts, as demanded by the President, as inflation is still significantly above the central bank’s 5% target.
The Erdogan versus Basci standoff has raised market speculations that the central bank chief Original post
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