MSCI Threatens Index Downgrades for Turkey and Indonesia Within Weeks of Each Other

MSCI, the index provider whose classifications guide trillions of dollars in passive investment, issued two separate warnings this week that could reshape how global funds view emerging markets. The firm froze certain planned changes to its Turkey index and warned of a potential downgrade for the country. Separately, MSCI warned it may remove Indonesia, south-east Asia's largest economy, from its main indices altogether, according to the Financial Times. These warnings matter because an MSCI downgrade or removal can trigger automatic selling by index-tracking funds, regardless of a country's underlying economic fundamentals. The Indonesia warning in particular raises concerns about investability in the broader south-east Asian region, since fund managers often use a country's MSCI weighting as a proxy for how easily they can buy and sell its stocks. Neither case has been resolved. MSCI has not announced a final decision on either Turkey's status or Indonesia's continued inclusion, and the outcome will depend on talks between the index provider and local regulators over market access rules.