Beyond MSCI: Why November matters for Türkiye

Morgan Stanley Capital International (MSCI) has shown that its concerns about Türkiye are serious. On Aug. 12, it announced that Tera Yatırım Menkul, Tera Finansal Yatırımlar and Kardemir B would enter the MSCI Türkiye Small Cap Index. On Aug. 25, it reversed the decision after feedback from investors and checks. The lesson is simple: meeting size and trading-volume requirements is not enough. MSCI must believe that a stock’s free float is genuine and its trading is reliable.

MSCI is not alone. S&P Dow Jones and FTSE Russell have raised concerns about ownership transparency and free float. FTSE has paused positive changes, including index additions, while it reviews MKK’s new methodology. Türkiye has not been downgraded or removed from any index. But until the reforms produce results, index providers will remain cautious.

Capital behind label

Institutional investors with Emerging Market mandates manage trillions of dollars, including pension funds, sovereign wealth funds, insurers and exchange-traded funds. Passive funds replicate indexes mechanically: if a country is removed, they must sell on the implementation date. Active funds often define their investable universe by the same classification. Even an optimistic manager may therefore have to exit as a matter of mandate and compliance.

Frontier funds command a far smaller asset pool. Reclassification would narrow Türkiye’s institutional investor base, reduce liquidity and amplify compulsory selling. Yet, the greater cost is reputational: index removal can occur quickly, while rebuilding confidence takes years.

Greece shows this asymmetry. MSCI downgraded it from Developed to Emerging Market status in 2013 amid the debt crisis, capital controls and market weaknesses. Its return was announced in March 2026, effective in May 2027. Restoring its status took 13 years. Classification is easier to lose than to regain.

Indonesia retained Emerging Market status in June, but its information flow assessment was lowered, and a possible Frontier review remained for November 2026. No downgrade has occurred for either Türkiye or Indonesia, but the window for credible delivery is real.

What MSCI is measuring

MSCI assesses foreign investor access, equal treatment, infrastructure, clearing and custody and available investment instruments. Türkiye performs positively on many technical criteria. The latest concerns focus instead on market integrity, particularly beneficial ownership, realistic free float calculations and coordinated trading. The question is not whether Türkiye has a functioning market, but whether international investors can trust that prices and ownership structures reflect genuine supply and demand.

Free float is the portion of a company’s shares genuinely available for trading. If shares presented as dispersed are concentrated among related funds or connected parties, the free float can exaggerate liquidity. Coordinated trading can then create an artificial appearance of circulation and distort price formation. For an institutional investor committing long-term capital, uncertainty about the ultimate owner becomes uncertainty about the reliability of the price itself.

Reform has already begun

The Capital Markets Board of Türkiye (SPK) has taken two important initial steps. Its free float reform excludes fund holdings controlled by parties related to an issuer when calculating shares genuinely available to the market. This responds directly to MSCI’s concern that holdings concentrated in small or related funds may inflate free float estimates. The direction is correct, but the decisive test will be consistent implementation and demonstrable results.

The second step addresses fund valuation. Under the decision adopted on July 23, exchange-traded units of real estate and venture capital investment funds are valued on the basis of net asset value rather than an exchange price that may have diverged sharply from underlying assets. This prevents an inflated market quotation from creating fictitious performance in another fund’s portfolio and brings valuation closer to international practice.

International experience shows that classification follows market design, not economic size. The United Arab Emirates (UAE) and Qatar entered the MSCI Emerging Markets Index in 2014 after improving foreign ownership rules, settlement and custody. Saudi Arabia followed in 2019 after opening its market, introducing short selling and securities lending, and aligning settlement with norms. Poland gained Developed Market status under FTSE Russell in 2018. South Korea, despite its scale, remains emerging because currency access and custody processes present obstacles. Regulatory resolve, not prestige, determines the outcome.

Türkiye should now convert the reform direction into a measurable delivery program. Beneficial ownership information should be disclosed more fully and promptly. Surveillance and enforcement against coordinated trading should be strengthened. Distorted free float should be identified through permanent, rules-based criteria, while related party transaction disclosures should meet international corporate governance standards. The effect of net asset value reform should be monitored and extended where similar valuation risks exist.

Execution will require close coordination among the SPK, Borsa Istanbul, the Central Securities Depository (MKK) and Takasbank. Ownership data should be centralized in a form that can be shared with index providers when necessary. Regular consultation with the Turkish Capital Markets Association and portfolio managers would allow regulators to test whether changes work in practice, not simply on paper.

Türkiye could consider a high-risk segment for securities that repeatedly diverge from fundamentals. Temporary exclusion from the BIST 30, BIST 50 or BIST 100, independent assessment reports and an electronic risk declaration could protect inexperienced investors without suppressing risk-taking. Access might be tied to objective suitability criteria, including market experience. Together, these tools would strengthen market integrity.

Confidence, not classification

Ultimately, the prize is not an index label but confidence in Türkiye’s capital markets. MSCI is a thermometer: it measures the fever, but it does not cause the illness. Confidence cannot be created by one circular or one announcement. It is earned through sustained, predictable implementation, credible supervision and prices that investors believe are genuine.

The SPK’s free float and net asset value reforms are sound starting points. The experience of Saudi Arabia, the UAE, Poland and Greece shows that determined reform delivers results, although reputational recovery takes time. If Türkiye uses the period ahead well, November need not be approached defensively. It can become the point at which Türkiye demonstrates that remaining in the emerging market universe is only the minimum objective. The larger ambition is to build the depth, liquidity and international credibility its capital markets deserve over the next decade.