Turkey stock market fund outperforming on rate cuts, growth prospects

The iShares MSCI Turkey ETF TUR exchange-traded fund is outperforming emerging market peers after the central bank slashed interest rates, a crisis between the United States and Iran abated and the country’s economy emerged from a recession.

The fund, which tracks Turkey’s main stock index, has gained more than 5 percent since the start of the year and around 15 percent over the past six months, Sanghamitra Saha, a senior equity and ETF research analyst at Zacks Investment Research, said in a report on Monday.

“The investment scenario in Turkey, a tremendous laggard one-and-a-half years back, is on an uptrend since the fourth quarter of 2019,” Saha said. “The winning momentum is showing no sign of losing strength.”

The central bank has slashed the benchmark interest rate to 11.25 percent in January from 24 percent in July and the inflation outlook seems decent despite a moderate recovery in economic activity, Saha said. Turkish Treasury and Finance Minister Berat Albayrak has predicted the economy will have grown an annual 5 percent in the fourth quarter of last year.

The main BIST-100 index of shares in Istanbul trades at 6.5 times estimated earnings compared with 13.1 times for the MSCI Emerging Markets Index, which could be a reason for the outperformance of the ETF, Saha said.

Saha said an easing in military and political tensions between the United State and Iran in January caused the Istanbul index to spike on Jan. 9, outperforming more than 90 other global equity benchmarks.

But while a series of rate cuts has helped propel stocks higher in recent months, the way ahead may not be so smooth, Saha said.

“With inflation exhibiting an uptrend, the central bank’s rate cut momentum is likely to slow down ahead or completely comes to a halt,” he said.

“Several market watchers are of the view that the benchmark would be somewhere around 11 percent. So, another cut is expected in the near term.  After that, increasing inflation, widening current account deficit and a likely weakening in the lira could push the central bank to go for rate hikes later in 2020.” Saha said.

“This is especially true given the strengthening of the U.S. dollar in recent times. So, even if there is a rally in TUR now, the winning momentum may fade in the medium term,” he said.