Turkey, uranium and blockchain ETFs made up an eclectic winners’ circle in Q3 as a summertime ‘dead cat bounce’ saw investors rotate into more niche, risk-on exposures.
Topping the leader board during the quarter were the $68m Lyxor MSCI Turkey UCITS ETF (TUR), $106m iShares MSCI Turkey UCITS ETF (ITKY) and $11m HSBC MSCI Turkey UCITS ETF (HTRD), which rallied 16.7%, 16.1% and 16%, respectively, over the three-month period.
However, while Turkish equities outperformed broader Europe by 58% between the start of the year and 9 September, this was likely caused by unorthodox Turkish monetary policy rather than anything merit-worthy.
Source: Bloomberg, US Global Investors
With the country’s employment sitting at 10.6%, President Recep Erdogan decided to ignore the 80% year-on-year inflation figure posted in September and cut interest rates by an additional 100 basis points (bps) – now down 600bps since last August.
In this scenario, Turkish investors may have given up looking for yield in the country’s bond issuance and instead continued piling into its equities, some of which have dislocated from fundamental valuations.
Foreign investors also joined the hunt for riskier returns, with August marking the biggest overseas inflow into Turkish equity since November last year, according to data from Bloomberg.
Next, the $24m HANetf Sprott Uranium Miners UCITS ETF (URNM) returned 14% over the three-month period as western policymakers sought ways to end their reliance on Russian fossil fuels.
In Europe, France has committed €52bn to at least six new pressurised reactors, the UK allocated £20bn to a new atomic plant while Germany and Belgium are reviewing their plans to phase out their nuclear capacity.
Elsewhere, Japan is planning to restart its reactors for the first time since the Fukushima disaster in 2011 and the $385bn Inflation Reduction Act in the US included tax credits for existing reactors, prompting California to extend the life of its last plant.
URNM outperformed its counterpart, the $24m Global X Uranium UCITS ETF, by 8% over the period given its more pure-play focus on uranium via exposure to the physical commodity as well as physical uranium, whereas URNU features some broader engineering companies in its basket.
Finally, blockchain ETFs went on a tear, with the Global X Blockchain UCITS ETF (BKCH), VanEck Crypto and Blockchain Innovators UCITS ETF (DAPP) and ETC Group Digital Assets & Blockchain Equity UCITS ETF (KOIN) returning 15.4%, 12.8% and 11.5% over the period.
While impressive given the difficult year thematic strategies have had so far, these returns all happened in one month – July – when blockchain ETFs returned between 47% and 66% in just four weeks.
As the July US inflation reading of 8.5% came in lower than expected, investors likely began betting on the Federal Reserve ending its interest rate hiking cycle sooner than anticipated by allocating to debt-laden growth stocks.
Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, told ETF Streamin August: “The past two months have seen what we call a junk rally.
“The assets that were hit hardest all year, mainly crypto, were the assets that rallied the most in July.”
Interestingly, as later inflation readings led the Fed to remain hawkish and investor risk-on appetite to vanish, all seven top-performing ETFs over the quarter have booked negative returns over the past month.
The worst-affected have been the blockchain and uranium ETFs, which have fallen between 12% and 17% in four weeks.