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Turkey ETFs: Huge Gains in October

Morningstar analyst Lee Davidson reveals why ETFs tracking Turkish equities had a month of strong gains

Lee Davidson 5 November, 2012 | 10:11AM

In October, exchange-traded funds (ETFs) and exchange-traded products (ETPs) tracking Turkish equities posted huge monthly gains (8-10%) on speculation that Moody' and Fitch would upgrade Turkey to investment grade status.

In June, Moody's upgraded Turkey to Ba1, one notch below the investment grade threshold upon noted improvements in public financials. Since then, the evidence supporting another upgrade has been accumulating. Since the end of 2011, Turkey's central bank has kept monetary policy relatively tight. Turkey has also unexpectedly reigned in its current-account deficit, something Moody's analysts had previously deemed as Turkey's main economic vulnerability. The country’s current account deficit has narrowed from 10% of GDP at the end of 2011 to 7.5% of GDP as of the end of August. In absolute terms the deficit fell from $4 billion to $1.2 billion, while analysts had expected the figure to be $2 billion. In response, Moody's said in a statement that it may consider upgrading Turkey if the government reduces its current-account deficit further or if the private sector reduces its reliance on external borrowing. Meanwhile, Fitch announced in October that they would review Turkey's rating on November 8th.

To learn more about investing in Turkey, read “Turkish Delight: Turkey is an Investment Sweetspot”.

Meanwhile, ETPs tracking industrial metals were amongst the worst performing products in October. Prices for industrial metals such as nickel, zinc, and aluminum declined by 10% to 15% on concerns that metal consumption in China may be slowing. Sentiment in the industrial metals space has been dampened due to worries about a 'hard landing' in China that could result in substantially lower metal consumption.

Industry experts are watching China's monthly Manufacturing PMI data very closely to keep tabs on developments in this area. China's October PMI came in at 49.1, a three-month high, but still indicating that manufacturing output is contracting because a number below 50 indicates contraction, while a number above 50 indicates expansion. Meanwhile, China's third quarter GDP growth slowed to 7.4% from 7.6% in the second quarter of 2012. This all contributed to a steep drop in industrial metal ETP prices in October.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author Lee Davidson

Lee Davidson  is an ETF analyst with Morningstar Europe.