When setting the table for Thanksgiving dinner, the roast turkey is likely to get the most attention.
But aside from the bird, another Turkey has caught the attention of investors this Thanksgiving. Yes, we are talking about the country.
The country’s investment scenario has improved as a pure game iShares MSCI Turkey ETF (DOOR – Free Report) is up about 12% over the past month (as of Nov. 21, 2022), beating the 8.2% gain posted by the S&P 500. So far in 2022, the Turkey ETF is up 62.5% vs. 17% losses in the major US Equity Gauge.
What’s behind the rally?
The Borsa Istanbul 100 index is hovering around a record high as investors continue to use equities as a hedge against rising prices and a falling lira. The central bank has slashed interest rates, contributing to the 850 basis point rate cut since September 2021, according to Trade Economists. This has supported the stock market.
The lira fell 55% over the period and consumer inflation surged to over 85% in October, its highest level in 24 years, compounded by broadly negative real interest rates and costly measures to stabilize the lira under pressure from President Tayyip Erdogan. Consequently, since the start of TCMB’s rate cut path, trading volumes have surged as Turkish residents sought assets to store their savings.
Will the rally collapse at the front?
Things don’t look promising from here. The annual inflation rate in Turkey rose further to 85.5% in October 2022, from 83.5% in the previous month, in line with the market forecast of 85.6%. The inflation rate in Turkey has risen for 17 consecutive months. It marked the highest interest rate since June 1998, when the lira extended from record lows and the central bank cut interest rates.
Despite the official inflation figures from the Turkish Statistical Institute, third-party figures are even more frightening. Economists at Inflation Research Group (Enag) state that Turkey’s annual increase in inflation is closer to 185%, as quoted in an article published on bitcoin.com.
Turkey’s economy grew by 7.6% year-on-year in the second quarter of 2022, recovering from 7.3% growth in the previous period and beating market forecasts of 7.5%. Adjusted for seasonal and calendar effects, the economy grew by 2.1% after 1.2% in the first quarter.
With this in mind, we can conclude that Turkey’s GDP can expand due to interest rate cuts. Turkey’s central bank is expected to cut interest rates by another 150 basis points to 9% this week and remain unchanged thereafter, according to a Reuters poll. If the rate-cutting cycle stops here, the lira could gain strength, which should bode well for the currency and the economy. We expect the Turkish stock market to remain range bound in the coming days.
TUR in focus
The iShares MSCI Turkey ETF offers pure exposure to 50 Turkish stocks. The fund is heavily focused on its top 10 holdings, which account for nearly 60% of assets. Industrials dominate the fund’s returns at around 26.95% of the portfolio, while materials, consumer staples and financials make up double digits in the basket. The iShares MSCI Turkey ETF charges investors annual fees of 57 basis points and produces an annual return of 2.13%.