Stratégie d’investissement
The Lyxor ETF DJ Turkey Titans 20 provides equity exposure to Turkey, the largest economy in emerging Europe. As is the case with all ETFs offering single country emerging market equity exposure, the Lyxor ETF is best deployed as tactical tool within a well diversified portfolio. The ETF can also be deployed as a core holding complementing exposure to emerging markets in Asia and Latin America. The index’s low to moderate correlations with international stock markets indicate that this fund could provide diversification benefits when added to an existing equity allocation. Over the last three years, The DJ Turkey Titans 20 Index correlated 56% with the MSCI EM Asia Index and 53% with the MSCI World Index.
The ETF is also suitable for investors with a bullish view on the Turkish stock market. However investors should be aware that the DJ Turkey Titans Index is not the best proxy for the Turkish economy. The index is heavily biased towards financials (46%), whereas the sector only represents about 3% of GDP.
Before considering an investment, investors should review their portfolio for existing exposure to the Turkish stock market through other holdings to avoid unintentionally over weighting this region. For instance, Turkish equities represent about 6% of the MSCI EM EMEA Index.
Analyse fondamentale
Structural reforms implemented during the last decade – a requisite of the stand-by agreement signed with the IMF in the early 2000s – set Turkey on a solid economic policy path, allowing it to rebound strongly from the global financial crisis. More recent rounds of reform and consolidation have focused on strengthening the banking sector. Growing confidence in the country’s economic prospects has led to strong growth in private sector credit to levels that could put smaller banks at risk if the recovery were to weaken. As a result, the Central Bank has intervened with the aim of curbing credit expansion by raising reserve requirements.
The Turkish economy grew by 8.2% y/y during Q3-11; market participants expected only 6.6% growth. Construction, manufacturing, financial institutions and private consumption were the main driver for this growth. A ballooning current-account deficit – expected to hit 10% of GDP this year – is seen as a key factor curbing foreign investors’ appetite for direct investment in the country. However, the deficit narrowed to $4.2bn in October after widening $6.8bn in September as import growth slowed down to 7.3% and exports expanded 10.8% in Q3 2011. Despite the strong GDP growth figures, the DJ Turkey Titans 20 equity Index underperformed other emerging market equity benchmarks in 2011; losing 22.6% of its value compared to a 18.4% decline for the MSCI Emerging Markets Index.
In contrast to most other emerging markets, Turkey remains predominantly concerned about inflation rather than economic growth; hence the Central bank is not expected to hike interest rates anytime soon. Inflation hit 10.45% in December, marking a three year high; and a level almost double the Central Bank’s target of 5.5% for 2011. As a result, second round inflation has become a real threat as Turks begin to price double-digit inflation into their wage negotiations.
In addition, Turkey also suffers from a weak currency. In 2011, the Turkish Lira depreciated over 15% vs. the Euro and 18% vs. the USD. Even though a weak currency supports exports, it makes imports of energy, raw materials and consumer goods more expensive, thereby further fuelling inflation. In early October, the Central Bank intervened directly in the foreign-exchange market for the first time in five years. However, Turkey has one of the lowest levels of foreign-exchange reserves relative to short-term debt amongst all emerging markets, thus offering little firepower. A more drastic intervention followed in late October when the Bank doubled the interest rate it charges banks for loans from 5.75% to 12.5%, while keeping the main base rate at record lows.
Up to now, the economy has been buoyed by expansion in the financial, retail, and construction sectors, but an economy overly dependant on domestic consumption may prove unsustainable in the long run. Nevertheless, the Turkish economy is expected to continue to grow on the back of a relatively young population, a skilled but relatively inexpensive workforce, well established industries and an improving investment environment supported by macro and political stability as well as a healthy banking sector.
Construction de l’indice
The Dow Jones Turkey Titans 20 Index provides equity exposure to the 20 largest and most liquid stocks in Turkey. The index’s prospective constituents include all stocks traded on the Istanbul Stock Exchange whereby every share that has not been traded for 10 days during the previous quarter will be excluded. The Dow Jones Turkey Titans 20 Index is a float-adjusted market capitalisation index, capping each constituent’s weight at 10%. The index is reviewed on an annual basis whereas the index component weights are rebalanced quarterly. Each month, the index provider populates a list of the 20 current component stocks and the 20 largest non-component stocks. This list suggests possible additions or deletions for the next review. As of writing, the index is biased towards the financial sector (46% of the index’s value), followed by telecommunications shares (15%) and consumer goods (14%). In addition, the index is heavily top weighted as the top 5 holdings represent about 40% of its value.
Construction du fonds
The Lyxor ETF DJ Turkey Titans uses the synthetic replication to track the DJ Turkey Titans 20 index. The fund uses unfunded swaps. Specifically, Lyxor holds a basket of European blue chip shares and enters a swap agreement with a counterparty (always Societe Generale). The counterparty contracts to deliver the performance of the DJ Turkey Titan 20 Index in exchange for the performance of the fund’s holdings. According to UCITS III regulations, individual counterparty risk exposure is limited to 10% of the fund’s NAV at any point in time. According to our research, the OTC swap is not collateralised, which effectively exposes the investor to a loss of up to 10% of the NAV if the swap counterparty defaults. However, Lyxor is now committed to target zero swap exposure on a daily basis and is also considering the virtues of adopting an overcollateralised structure. Lyxor does not currently engage in securities lending, which helps to minimise overall counterparty risk. Dividends are accumulated throughout the year and held in a ‘cash bucket’ until they are distributed to fund holders once a year in September. This dividend treatment can potentially create a drag on returns in upward trending markets because dividends are not reinvested into the fund. In practice this cuts both ways. It could also result in outperformance if the benchmark falls.
Frais
The fund levies a total expense ratio of 0.65%. This lies in the middle of the range of ETFs tracking Turkish equities.
Alternatives
As of writing, there are five other ETFs providing equity exposure to Turkey. The largest in terms of total assets under management is the iShares MSCI Turkey (IE) ETF. The ETF from iShares uses full replication and offers very similar market exposure in terms of sector breakdown and number of holdings. The iShares fund levies a total expense ratio of 0.74%.
Investors preferring a more diversified approach to investing in the EMEA region might consider the db x-trackers MSCI EM EMEA ETF. This ETF uses synthetic replication to track an index that is biased towards South Africa (43%), followed by Russia (36%) and Poland (7.5%). Turkey represents 7% of this index’s value. On a sector level, the MSCI EM EMEA Index is biased towards energy (29%) and materials (16%).
