ETF XRAY

Turkey ETF Needs Economic Reform Agenda

By Carl Delfeld of the Chartwell ETF Advisor

Turkey's Turkish Investment Fund (TKF) closed-end fund has been on roll since mid-August but may hit a wall unless a robust economic reform plan is put in place and acted upon.

Five years of strong economic growth averaging 7.4% per year were the primary reason the pro-business government of Recep Tayyip Erdogan received an overwhelming mandate for a second term this summer.

Also at risk is the strong lira which has risen sharply both because of high Turkish interest rates and because it is significantly exposed to the carry trade, in which investors borrow money in low interest rate currencies such as the yen and invest it in high-yielding currencies such as the lira which offers real returns of about 10 per cent.

According to the Financial Times, the IMF team negotiating with the Turkish government is particularly concerned with the country's economy because of its large current account deficit equal to roughly 8 per cent of GDP and because companies have huge foreign currency borrowings. On the positive side, Turkey has been attracting lots of foreign investment, which also could be a factor in TKF's upswing. Its economy is steadily improving as well. Inflation was up to 69% as recent as 2001, and now it is down below 10% with an average GDP growth of 8% over the past three years.

Find out if Turkey belongs in your global portfolio by joining the Chartwell ETF Advisor

Turkey Landslide Election Victory Buoys Market

Turkey's stock market rose to record levels as the Justice and Development party (AKP) led by Recep Tayyip Erdogan won about 46.4 per cent of the popular vote in Sunday’s election, giving it 340 seats in the 550-seat parliament.

Two parties representing the secular and nationalist opposition were on target to win a combined 34 per cent. Independent candidates representing the mainly Kurdish south-east of Turkey won 26 seats. the main opposition secular-oriented Republican People’s party's share of the vote increased by only a small margin and the nationalist National Action party became the third party in parliament as debates over the Iraq war and Turkey’s efforts to join the European Union continue.

The main ISE National-100 stock market index stood 3.84 percent higher at 54,966.60, exceeding last week’s record high which anticipated an AKP pro-business, pro-privatization return to power.

By Carl Delfeld of the Chartwell ETF Advisor

Turkey ETF Jumps 7% Before Weekend Election Challenge

The Turkish Investment Fund (TKF) jumped 7% today just ahead of a key election this weekend. Turkey’s general election on July 22nd is important for Turkey’s image in the investment world and will go a long way in determining whether its market reforms and momentum march on as iShares plans the launch of its new Turkey exchange-traded fund.

Expectations are that the pro-business AKP will be returned to power but in a somewhat weakened position. The opposition Republican People’s Party could pull an upset which would slow down Turkey’s vigorous privatization program and encouragement of foreign investment.

Turkey is also attracting robust flows of foreign direct investment. It currently represents 4.5% of GDP and has gone from less than 1 billion in 2003 to $18 billion in 2006 with the financial sector attracting the bulk of this capital. Part of this is due to a better economy and more fiscal discipline. Inflation was as high as 69% as recent as 2001 and is now down below 10% with average GDP growth of 8% over the past three years. Auto exports from Turkey to Europe are rising rapidly as both Toyota and Ford have expanded plants.

While waiting for the Turkey iShare to come to market, your best vehicle may be the closed-end Turkish Investment Fund (TKF) managed by Morgan Stanley. Its top holdings are Turkiye Garanti Bank at 10% of assets, Aksigorta at 8.5% and Bim Birlesik and Coca-Cola Icecek at 6.5%, respectively. This closed-ended fund has gone from trading at a 20% premium last December to a recent 4% discount to its net asset value. Because of this, its performance has been a bit odd this year. While its net asset value is up 29% so far this year, its share price has lagged behind by a substantial margin though today's jump will close the gap.

Posted by Carl Delfeld of the Chartwell ETF Advisor