Until now, investors with an inclination for exchange-traded funds or emerging markets, or both, have been more or less spared any truly serious inconvenience that may have resulted to the global economy from the so-called Arab Spring protests-cum-civil wars that have rocked the Eastern Mediterranean and North African regions over the last two or so years. But the massive protests that broke out in Turkey has been far more significant for Emerging Market ETFs.
Turkey is, of course, not a Middle-Eastern country, but it does share significant cultural and political affinities with many of the nations in the region with which it shares a long and rambling Southeastern border. Moreover, since the outbreak of unrest in countries such as Egypt, Tunisia, Bahrain, and Syria over two years ago that toppled or drastically undermined decades-old dictators and caught Western nations completely off-guard, Turkey has been held up as a cultural, political, and especially an economic role-model.
Turkey’s transformation over the last decade or so since the rise to power of the moderate Islamic Justice and Development Party (AKP) headed by Prime Minister Tayyep Erdogan has been nothing short of dramatic. An economist by training, Erdogan accomplishments are not to be belittled.
He has attracted a huge influx of foreign investment into the country, has presided over the most significant shift in the country’s absolutely deplorable policies towards its large minority Kurdish population, and perhaps most important, has made democracy and civil society concrete and meaningful concepts in a country that throughout the second half of the 20th century was more familiar with military coups, brutal martial law, and a dismal statist economy.
Still, the AKP government’s violent reaction to what began as relatively minor and entirely peaceful demonstrations against the gentrification of a bohemian neighborhood in Istanbul has been frighteningly similar to the manner in which former Middle-Eastern autocracies reacted when the Arab Spring broke out not so long ago.
This suggests the unfortunate possibility that is not simply the unrest itself that is spooking investors, but also the fact that the Turkish government is undoing the image of itself as a blueprint for how its southern Islamic neighbors might adopt more democratic systems and more open market-based economies.
There are at least four exchange-traded funds whose performance since Monday has revealed just how quickly investors have become skittish about Turkey’s recent troubles:
iShares MSCI Turkey Investable Market Index (TUR)—The fund seeks investment results generally corresponding to the price and yield performance of the MSCI Turkey Investable Market Index. Since last Thursday, prior to the onset of protests, TUR has dropped over 10 percent to $63.66 after trading just shy of its all-time high of $78.54 only the prior week.
Market Vectors Emerging Markets Local Currency Bond ETF (EMLC)—The fund seeks to replicate the price and yield performance of the J.P. Morgan Government Bond – Emerging Markets Global Core Index, which provides direct exposure to local currency bonds issued by emerging market governments. EMLC allocates only 7.4 percent of the fund to Turkish debt, but has dropped 2.3 percent to $25.60 since last Thursday. The fund had advanced 7.7 percent to $27.75 prior to mid-May, just cents shy of its all-time high. Furthermore, EMLC’s losses this past week have occurred at unusually high volume.
SPDR S&P Emerging Europe (GUR)—The ETF attempts to match the returns and performance of the S&P/Citigroup BMI European Emerging Capped Index, a market cap-weighted index of publicly traded companies from Europe’s markets, including the Czech Republic, Hungary, Poland, Russia and Turkey. While nearly 60 percent of GUR is allocated to Russia, Turkey claims almost 23 percent of it. Since last Thursday’s close, it has dropped 4.72 percent to $38.75 per share, after advancing 18.70 percent over the year leading up to the protests.
iShares Emerging Markets High Yield Bond (EMHY)– The fund corresponds to the price and yield, before fees and expenses, of the Morningstar Emerging Markets High Yield Bond Index, which tracks the performance of the below-investment-grade emerging market sovereign and corporate high yield bond market. Devoted almost 19 percent to Turkish high-yield bonds, the fund dropped over 3 percent since Thursday’s close to $51.96, also on unusually high volume.