Turkish equity exchange traded funds have seen strong inflows over the weeks running up to Sunday’s presidential election, despite steadily falling returns from the stock market they track and lingering concerns over the economic stability and prosperity of the country.
According to TrackInsight data, the past month to the 21 June has seen total inflows of €222 million into the Turkish Stock ETF sector, despite a return of -9.5% over the period (see chart below).
The recent inflows follow months of low demand for the sector, which has suffered from steadily declining performance, down some 30% over the year to date. June is the first month to bring cumulated inflows for the year to date back into the black, as the chart below reveals.
These inflows have come in the run-up to the latest presidential election in Turkey, the sixth in four years and the second of these under emergency law, after President Recep Tayyip Erdogan brought the vote forward by 18 months in a bid to help his country “overcome uncertainty”.
While the country certainly finds itself in an unstable situation, Erdogan’s critics have also suggested he may be pushing the election through earlier than planned because he expects the economic situation in the country to get materially worse in the coming months.
So far this year, the Turkish lira has depreciated by some 25% against the US dollar, inflation is stuck in double digit territory (12.2% in May year-on-year), while concerns remain over the independence of the central bank, despite its recent decisive action on interest rate policy.
Although first quarter economic growth in the country came in at a strong 7.4%, the expectation is that Q2 GDP growth will show a sharp slowdown as a result of currency weakness and three interest rate hikes since April, totalling 500 basis points.
So why the inflows?
Recent inflows into Turkish ETFs, however, indicate that some investors have faith that the economic situation in the country is set to improve in the foreseeable future and expect the equity market to rise from its decade low.
Turkey’s main stock market, the Borsa Istanbul 100, is trading at its lowest level in US dollar terms since the financial crisis in 2008, at 95,852, having fallen below a key psychological level of 100,000 early in the month. In lira terms, it is down 17% so far this year, according to Bloomberg.
However, the recent interest rate hikes and the central bank’s move to simplify its monetary policy framework were met with widespread approval, and could mark the beginning of a step in the right direction for the country if these measures continue after the election.
The inflows under a microscope
Yet looking more closely, it is evident that more than half the inflows over the past month (€114 million) came in on one day – 12 June – and went exclusively into the iShares MSCI Turkey UCITS ETF – USD, which now has €285 million in total assets.
It is therefore not clear if this high figure is the result of monthly rebalancing of the fund or a single purchase by a large investor.
However, even if we discount this one-off inflows as an indicator of sentiment, the general picture for the month still points to tentative support for the Turkish market, which is well overdue a boost after a difficult year so far.