Turkey’s stock market has recently come under intense scrutiny following a tumultuous week characterized by significant financial upheaval. Regulatory authorities are grappling with investment funds that are heavily invested in illiquid stocks, while concerns regarding the overall market structure have been raised by index providers. This situation prompts a deeper examination of the recent selloff, government responses, and the systemic issues plaguing Turkey’s equity market.
Overview of Market Declines
Last week, Turkey’s primary stock index plummeted more than 8%, marking the most drastic decline since March 2025, which followed the controversial jailing of Istanbul Mayor Ekrem Imamoglu. The market’s decline was exacerbated by fears surrounding investment funds that were significantly reliant on illiquid, low-free-float stocks. As worries escalated about these funds, many had to liquidate their holdings in more liquid assets to fulfill redemption requests. This selling pressure not only worsened the market’s performance but also triggered further withdrawals from investors.
Pusula Portfoy was the first asset management firm to announce its inability to meet redemption requests last Tuesday. The aftermath was a significant drop of around 5.5% in the benchmark index the following day. Compounding these issues, Tera Portfoy, which had just acquired Pusula, disclosed similar challenges within its own funds, underscoring the volatility surrounding these investments.
Government Actions and Interventions
In a bid to stabilize the market, Turkish authorities took swift actions. The Financial Stability Committee convened an emergency meeting, during which the central bank significantly increased its repo funding limit from a few billion lira to a staggering 603 billion lira ($12.35 billion). Additionally, the interbank borrowing limits for banks were raised tenfold to enhance liquidity.
Regulatory body Capital Markets Board (SPK) responded by easing margin trading requirements until October 2 and launching criminal investigations regarding alleged market manipulation. Among those targeted in the investigations are executives from Pusula and Tera, as well as the liquidation of 131 funds managed by several asset managers. These funds collectively manage over $18 billion in assets and cater to approximately 353,000 investors.
Origin of the Pressure
The roots of this market turmoil can be traced back to late August when new regulations were introduced by Turkey’s Capital Markets Board. These regulations imposed stricter limits on holdings in illiquid stocks, capping exposure at rates between 2% and 8%. As these measures were phased in from October through December, many funds were compelled to reevaluate their liquidity and investment strategies. Consequently, this reevaluation led to the significant selling of thinly traded stocks, which contributed further to last week’s market downturn.
Broader Structural Issues
Despite having a substantial number of listed companies, Turkey’s equity market is hampered by a lack of sufficiently large and liquid stocks that are able to handle significant institutional investments. Numerous major businesses remain unlisted or are closely held by founder families, resulting in limited free float. This scenario means investor capital is often concentrated in a smaller set of stocks, amplifying volatility and complicating price discovery. The implications of such concentration can lead to distorted market behavior when substantial funds take positions in illiquid shares.
International index providers have actively monitored these developments. Concerns have been raised regarding market accessibility and ownership transparency, and MSCI has notably withheld plans to integrate Turkish companies into its Global Standard Index due to unsatisfactory conditions. Any deterioration in Turkey’s market classification may jeopardize foreign investment interest, with analysts urging that the Capital Markets Board’s recent measures may help address these concerns.
In conclusion, while the current market distress poses some challenges, analysts generally do not view this situation as a systemic risk to Turkey’s economy. The market’s struggles primarily affect retail investors, and experts believe that the issue can be contained without escalating into a larger financial crisis.