EMERGING MARKETS-Turkey, Indonesia hit by MSCI downgrade warnings
By Johann M Cherian and Sudeshna Ghoshal
Oct 16 (Reuters) - Indonesian and Turkish stocks sank on Friday after index provider MSCI warned of downgrades from emerging market status, citing a lack of transparency over trading practices.
Turkish stocks .XU100 slid 3.3% to a January low and were set for their fifth straight week of losses after MSCI cited concerns and froze certain changes to its equity indexes tracking the country.
MSCI also said it needed more time to assess market reforms and warned of a downgrade to "frontier status" if sufficient progress was not made by mid-2027. Turkey's banking index .XBANK fell 2% and the lira was flat at 49.52 a dollar.
"The recent MSCI actions will continue to affect market sentiment and things will only stabilise when we move beyond the issues that MSCI has identified," said Zin Bekkali, CEO at frontier-focused asset manager Silk Invest.
In a worst-case scenario, he predicted Turkish markets could fall another 20% to 30% over the next year.
Turkey's Capital Markets Board introduced new limits in August on holdings of illiquid stocks and stricter requirements for portfolio management companies, triggering forced selling in local stocks and leaving some funds unable to meet redemption requests.
Investing in the country is also broadly seen as risky given President Recep Tayyip Erdoğan's periodic attempts to clamp down on opposition and interfere in central bank policy. The next immediate test will be S&P Global's review of Turkey's credit rating later on Friday.
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LOSSES DEEPEN IN INDONESIA
In Indonesia, stocks .JKSE fell 11.4% in their biggest daily drop since January 1998 after MSCI laid out a plan to remove Southeast Asia's largest economy from a suite of indexes tracked by funds. The rupiah was among the biggest fallers across emerging markets, dropping 0.5%.
MSCI froze Indonesia in its indexes in January and threatened a downgrade to "frontier" status because of opacity in ownership and trading behaviour. It now said progress had lagged and proposed a downgrade to "standalone" status, putting it on par with Lebanon and Argentina.
Both markets have witnessed significant declines this year. Turkish equities are down over 22% from their all-time high, marking what would be considered a traditional bear market by some definitions, while Jakarta stocks have sunk over 40%.
"We were surprised by MSCI's proposal to reclassify Indonesia as a standalone market, a category below even frontier. That seems extreme," said Juan Torres, co-manager of the Neuberger Emerging Markets Equity fund.
"What this does is increase uncertainty and leave the market in limbo for an extended period. Meanwhile, the Indonesian macro backdrop shows no real stress."
UBS said the moves would trigger roughly $4 billion of passive outflows from Indonesia and $3.7 billion from Turkey, with active mandates potentially adding a further $15 billion across both. JPMorgan estimated Indonesia would lose about $4.8 billion in passive investments.
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AI WORRIES
MSCI's gauge for emerging market stocks .MSCIEF was up 0.7%, but on track for its biggest weekly loss since March due to steep AI-driven losses in South Korea .KS11 and Taiwan .TWII over debt-financing and competition concerns.
The currency gauge .MIEM00000CUS edged up 0.3%, with India's rupee among top gainers after efforts by the central bank to halt the currency's slide.
Romanian stocks .BETI gained 1% and were set for their biggest weekly gain since late June on hopes of political stability returning, while South Africa's rand firmed 0.5%, with the focus shifting to next week's medium-term budget.