October 7, 2022

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Stock trading in Turkey was up an impressive 37% for the year as of Friday, September 9, making them the best performing equity market relative to other global markets. Given that most regions are still underwater in 2022 — including North America, Europe and emerging markets as a whole — investors may ask what’s behind Turkey’s rally.

Let’s start with the facts. Turkey is facing record-high inflation right now, with consumer prices falling by 80% in August compared to the same month last year. President Recep Erdogan, who has unconventional control over the country’s monetary policy, slashed the interest rate to 13% from 14% in July.

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As you are probably aware, this is not the expected way of addressing inflation. To counter rising prices, policy makers of central banks usually Raise, Borrowing costs, rather than lower, can have the desired effect of slowing demand. The US Fed funds rate, for example, has been raised four times so far this year, with another increase but guaranteed after a Labor Department report that annual inflation hit a 40-year high in August. Earlier this month, the European Central Bank (ECB) made the biggest rate hike in its history, raising it to 0.75%.

But Turkey’s Erdogan is different. He would prefer to keep the economy moving unabated, and so the benchmark rate is currently down about 600 basis points (bps) from August 2021, and down 1,100 bps from June 2019.

Trying to beat inflation in a low-yield environment

I believe this is the main contributing factor to Turkey’s stock rally. Turkish investors appear to have been pouring money into the country’s equities in an effort to beat inflation, perhaps with little regard for fundamentals. Monetary policy is being relaxed at the moment, so government bonds will not work. (A fall in interest rates causes bond prices to rise and yields fall.)

Then, here are the facts: The yield on Turkey’s 10-year bond is currently trading at around 10%, well below the 80% inflation rate. Despite historically high inflation, many Turkish stocks, meanwhile, have risen over 100%, 200% and even 300% in US dollar terms. Where is a Turkish investor supposed to put his money?

It’s not just local investors who are participating. Historically, foreign investors made up a small fraction of total investors in Istanbul-listed stocks, but according to Bloomberg, many of them accelerated purchases of Turkish shares in August at the fastest pace since November.

Very low valuation for financials

Another catalyst for the rally could be that Turkish stocks are incredibly cheap right now on a price-to-earnings (P/E) basis. According to JPMorgan, Turkey is currently the cheapest market in the entire CEEMEA (Central and Eastern Europe, Middle East and Africa) region. This is especially true for Turkish banks and financial firms, which had an ultra-low P/E of 2.2 at the end of August, down from a recent high of 6.0 in early 2021.

Turkish banks have been in the news in recent months, with at least five of them agreeing to adopt Russia’s Mir payment system after the country was removed from SWIFT (Society for Worldwide Interbank Financial Telecommunications) in response to Ukraine’s invasion. is expressed. Although Turkey initially criticized Russian President Vladimir Putin for the move, it has avoided imposing sanctions on the country, similar to the US and Europe. In early August, President Erdogan predicted that Turkey’s payment in Russian rubles for imported Russian energy would be a major source of financial aid for both countries.

He was not wrong. Many Turkish banks had a great June quarter. Yap Kredi- Country’s fourth largest bank and a holding in our Emerging Europe Fund (eurox, As of June 30, 2022—reported $1.3 billion in net income in the first half of 2022, a nearly 180% increase over the same six-month period a year ago. Yapi Credi was up 96.08% for the year till September 9.

View the Top 10 Holdings in EUROX By Click here

get to know eurox

In fact, among the best performing companies eurox For the year there were those who are domiciled in Turkey. Besides Yapi Credi, oil refiner Turkiye Petrol Refineryry, up 57.64%, and industrial conglomerate Coke Holding, up 30.70%.

As of June 30, Turkey had the third largest weighting in Eurox after Poland and Hungary, representing approximately 14% of the fund. We were very quick to divest from Russian equities in February this year, soon after the attack, and this helped the fund’s performance relative to its benchmark, the MSCI EM Europe 10/40 Index. For the first half of the year through June 30, EUROX returned a negative 47.19%, significantly outpacing the benchmark, which fell 74.17%.

Click here to learn more about Eurox.

Please click Here To view Eurox prospectus.

Fourside Fund Services, LLC, Distributor. US Global Investors are investment advisors.

Total Annual Return as on 6/30/2022:

Funds-YearFive-YearTen-Year Gross Expense RatioEmerging Europe Fund (EUROX)-46.27%-9.72%-6.78%2.49%MSCI EM Europe 10/40 Index-74.41%-19.19%-11.18%N/A

The performance data cited above is historical. Past performance is no guarantee of future results. The results reflect the reinvestment of dividends and other income. For a portion of the period, the fund had spending limits, without which the returns would have been lower. Current performance may be higher or lower than quoted performance data. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be higher or lower than their original cost. The performance does not include the impact of any direct charges described in the fund’s prospectus, which, if applicable, would reduce your total return. Quoted performance for a period of one year or less is cumulative and not annual. Get performance data current at the end of the most recent month www.usfunds.com or 1-800-US-FUND.

Mutual fund investing involves risk. Principal loss is possible. The stock market can be volatile and share prices may fluctuate in response to sector-related and other risks described in the fund prospectus. Foreign and emerging market investments involve special risks such as currency fluctuations and low public disclosure, as well as economic and political risks. By investing in a specific geographic area, a regional fund’s returns and share price can be more volatile than a less concentrated portfolio. Emerging Europe Fund invests more than 25% of its investments in companies primarily engaged in the oil and gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more vulnerable to risk in these industries than those that do not concentrate their investments in one industry and can make the fund’s performance more volatile.

The MSCI Turkey Index is designed to measure the performance of the large and mid-cap segments of the Turkish market. With 12 components, the index covers approximately 85% of the equity universe in Turkey. The MSCI North America Index is designed to measure the performance of the large and mid-cap segments of the US. and the Canadian market. With 716 components, the index covers approximately 85% of the free float-adjusted market capitalization in the US and Canada. The MSCI All Country World Index (ACWI) is a stock index designed to track broader global equity-market performance. Maintained by Morgan Stanley Capital International (MSCI), the index comprises stocks of approximately 3,000 companies from 23 developed countries and 25 emerging markets. MSCI Emerging Markets Index Receives large- and mid-cap representation in 24 emerging market (EM) countries. The MSCI Europe Index is a stock market index that measures the performance of large and mid-cap companies in developed countries in Europe. With 432 components, this index covers approximately 85% of the market capitalization in the developed countries of the European region. The MSCI Turkey/Financial Index is a free-float weighted equity index. It was developed as of December 31, 1998, with a base price of 100. The MSCI Emerging Europe 10/40 Index is a free-float-adjusted market capitalization index. The MSCI Emerging Markets (EM) Europe 10/40 Index is designed to measure the performance of large- and mid-cap representation across the 6 Emerging Markets (EM) countries in Europe.

The price-to-earnings ratio (P/E ratio) is a ratio for valuing a company that measures its current share price relative to earnings per share (EPS). Basis point (bps) refers to a common unit of measurement for interest rates and other percentages in finance. A basis point is equal to 1/100th of 1% or 0.01% or 0.0001 and is used to represent a percentage change in a financial instrument.

Fund portfolios are actively managed, and holdings can change daily. Holdings are reported as of the end of the most recent quarter. Holdings in Emerging Europe Fund as a percentage of net assets as on 6/30/2022: Yapi Ve Credi Banksy AS 2.48%, Turkiye Patrol Rafinrileri 2.16%, Koç Holding AS 3.04%.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be suitable for every investor.

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