Lyxor ETF Turkey (DJ Turkey Titans 20) (EUR) | LYYG |
par
Gordon Rose, CIIA, CAIA21/05/2013
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 38% with the MSCI EM Asia Index and 41% 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 (55%), whereas the sector represents less then 5% 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 around 10% 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.
Turkey finds itself in a challenging position as it is located between a struggling Eurozone and a political turbulent Middle East. After four years of strong growth, the Turkish economy slowed down in 2012, with GDP growing by 2.2%, below the government’s 4% forecast. For 2013 the European Bank for Reconstruction and Development (EBRD) forecast GDP to expand by 3.7% as the economy is expected to benefit from loose monetary policy spurring domestic demand. The IMF has marginally lowered its growth forecast for Turkey to 3.4% from 3.5%.
As we write, investors are actively betting on Turkey securing a second investment grade rating. This could flood the domestic market with overseas money, as many asset managers can only invest in countries with at least two investment grade ratings from the three big rating agencies. After Fitch upgraded the country from “junk” to investment grade at the end of 2012, Moody’s and S&P increased their ratings this year to just one notch below investment grade, with S&P granting a stable outlook as the country slowly rebalances towards a more export orientated economy. Moreover, a recent deal with the country’s Kurds, representing about 20% of Turkey’s population, is seen as positive by the rating agencies as it frees up capital from security related expenditure while potentially improving the regional economy and cross-border trade flows.
Despite all these positives, Turkey has struggled to attract foreign investor’s capital for infrastructure projects, as it deals with a series of structural problems. The current account deficit continues to be a major challenge as the country heavily depends on energy imports. Aside from conditioning external financing needs, it makes domestic inflation heavily sensitive to oil and gas international price movements. The official inflation target for 2013 is 5.3%, but it was already running at 7.3% in March. Meanwhile, the current account deficit widened to 6.2% of GDP in February from 6% at end 2012, and most economists expect it to widen even further to 7.6% by year-end. Market participants argue that the country cannot sustain a deficit of more than 5% as it leaves the country vulnerable for external shocks.
In order to support growth, counter currency appreciation, and avert a too high increase in the current account deficit, the Central Bank recently cut its key interest rate from 5.5% to 5.0% - a record low. Still, the high interest rate differential to developed markets continues to attract carry trades. The Lira has appreciated over 18% versus the USD and 23% versus the Euro over the last three years.
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 (55% of the index’s value), followed by consumer goods (12%) and telecommunications shares (11%). In addition, the index is heavily top weighted as the top 5 holdings represent about 50% of its value.
Construction du fonds
The Lyxor ETF DJ Turkey Titans uses the synthetic replication to track the DJ Turkey Titans 20 index. To achieve this performance, the fund holds a basket of blue chip shares and enters an un-funded swap agreement with parent bank Societe Generale. The bank then gives away the performance of the DAX (net of fees) 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. However, Lyxor has a daily target of zero swap exposure. Swaps are reset whenever their value becomes positive. They may sometimes have a negative value (between -2% and 0%), which would mean in this case that the fund owes the counterparty money. The fund’s holdings consist of highly liquid equities from OECD countries, the large majority of which are European. Lyxor does not engage in securities lending within the fund, which helps to minimise overall counterparty risk.
Frais
The fund levies a total expense ratio of 0.65%, which is in the middle of the range for ETFs tracking Turkish equities. Other potential costs associated with holding this fund which are not included in the TER include swap fees, bid-ask spreads and brokerage fees.
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 (41%), followed by Russia (33%) and Turkey (13%). On a sector level, the MSCI EM EMEA Index is biased towards financials (32%) and energy (24%).
