S&P downgrades Turkey – time to exit?

Standard & Poor’s downgraded the sovereign credit rating of Turkey from positive to stable on Tuesday, indicating that the country is unlikely to receive either an upgrade or a downgrade within the next 12 months.

Image courtesy TekinT: http://www.photoxpress.com/search-stock-photos-photographer/TekinT/244826

Turkey's capital Ankara nestles on the edge of hills in the middle of the country

S&P cited subsiding external demand and deteriorating terms of trade as its primary reasons behind the downgrade.

The potential drop off in external demand stems from the poor economic health of its largest trading partner, the euro zone. A dearth of export demand could exacerbate headwinds facing the Turkish economy.

As well, because Turkey has minimal hydrocarbon reserves, the country has to import the majority of its fuel, which strains its balance of trade.

However, all is not doom and gloom in Turkey by any means. The country’s previously troubling current accounts deficit is improving. Central bank measures to cool the economy from overheating appear to be working, although inflation remains a concern.

The takeaway for investors is that Turkey remains a compelling growth story for investors looking for emerging market middle class growth; however, external pressures could handicap the Turkish economy in the short-term.

Long-term investors may wish to consider the iShares MSCI Turkey Index Fund (TUR, quote) on any major pullback.

Traders will see that TUR recently broke its 50-day moving average and may now test support at the convergence of the 100 and 200-day moving averages located between 48.25 and 48.50. A failure to hold at these levels could signal a further move down. As well, traders should look for fundamental weakness in oil prices as an opportunity to go long Turkey.

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