Morgan Stanley Warns of Major Correction for Borsa Istanbul

In a stark “reality check” for Turkish investors, global investment bank Morgan Stanley has warned that the recent rally in Turkish equities is decoupling from macroeconomic fundamentals. According to a strategy report released on February 25, 2026, the 25% dollar-based surge in the MSCI Turkey index since the start of the year is “unsustainable” and is likely to correct downward.

The Valuation Gap: Stocks vs. Reality

Led by strategist James Lord, the report argues that Borsa Istanbul (BIST) has entered a phase of “multiplier expansion” rather than growth driven by actual corporate earnings. While the Turkish market has become the 5th best-performing market globally and the 2nd in the EEMEA region this year, Morgan Stanley warns that this momentum is “defying macroeconomic gravity.”

Key Disconnects Identified by Analysts:

• The Bond Market Mismatch: While stock prices are pricing in an optimistic, rapid decline in inflation, the 2-year benchmark bond yield has remained stagnant. This suggests that the debt market does not share the same aggressive disinflation story that stock investors are buying into.

• Overheated Expectations: The report notes that current market pricing assumes a “near-perfect” disinflationary path, which isn’t supported by February’s stubborn inflation data.

• Policy Persistence: Morgan Stanley expects interest rates to remain “higher for longer” due to persistent inflationary pressures, a reality they believe the stock market has yet to fully digest.

Strategic Pivot: Where the “Smart Money” is Moving

Despite the grim outlook for the broader index, Morgan Stanley isn’t completely bearish on Turkey. They have identified a few specific pockets of opportunity and strategy for the 2026 climate:

1. The “Banking Exception”: Analysts noted that Turkish banks are still trading at significant discounts. Unlike the broader industrial and retail sectors, banks are seen as having a “buffer” and remain a potential area for upside.

2. The “Carry Trade” Play: On the macro side, the bank recommends avoiding long-term bonds and instead focusing on “carry trade” operations. With Turkish interest rates remaining high and the Central Bank (CBRT) committed to a tight stance, the strategy of earning high-interest returns on the Lira is currently preferred over equity risk.