Indonesia’s Jakarta Composite Index slid more than 5% on Monday, reaching its lowest level since early October 2020. The sharp decline extended a broader sell‑off in the market and was driven largely by heightened anxiety that MSCI may reclassify the country from an emerging‑market designation to a stand‑alone status.
MSCI proposal and its potential impact
On Friday, MSCI announced a proposal to move Indonesia out of its emerging‑market indexes. The final decision is slated for June and will depend on whether Indonesian authorities can demonstrate meaningful improvements in market governance and transparency. A reclassification would likely remove Indonesia from major global equity benchmarks, a scenario that has already rattled investors.
Potential fund outflows and foreign ownership trends
Goldman Sachs warned in a Sunday note that a full removal from MSCI’s emerging‑market indexes could trigger about $5.6 billion in passive fund outflows. That amount corresponds to roughly 18 days of average daily trading volume for constituents of the MSCI Indonesia Investable Market Index. The bank also noted that a similar move by FTSE Russell could expose an additional $2.7 billion, though it treated that as a separate, hypothetical scenario.
Goldman estimated that active funds benchmarked to MSCI and FTSE indexes hold more than $8 billion in Indonesian equities. While these investors would not be forced to sell automatically, any discretionary selling could add further pressure to the market.
The MSCI Indonesia Index has already fallen 47% this year, according to the bank’s data. During the same period, foreign investors withdrew a net $5.1 billion from Indonesian equities. Foreign ownership of Indonesian stocks dropped to 25% in October, down from 27% in January, and the total value of foreign holdings fell to roughly $130 billion from $250 billion.
Outlook and monetary policy expectations
Despite the steep decline, Goldman Sachs cautioned that the market may not have reached its bottom. The MSCI Indonesia Index’s 12‑month forward price‑to‑earnings ratio fell to 7.3 times, the lowest level since the global financial crisis, yet it remains above historical troughs.
Goldman strategists, led by Alvin So, maintained an underweight rating on Indonesian equities, citing persistent index uncertainty, weak corporate earnings, and macroeconomic headwinds. They observed that valuations have compressed significantly but still sit above historic lows, limiting the potential for a near‑term re‑rating.
The analysts also projected that Indonesia’s central bank would raise interest rates twice more, each by 25 basis points, in the fourth quarter of 2026 and the first quarter of 2027. Such moves could add further strain to economic growth and equity valuations.
Overall, the combination of MSCI’s pending reclassification, sizable potential passive outflows, and a weakening foreign ownership base has created a fragile environment for Indonesian equities. Market participants will be watching closely for MSCI’s final decision in June and any policy signals from the central bank as they assess the outlook for the country’s stock market.
Mitchell Landsberg is a Senior Technology Correspondent at News Raise. He covers consumer electronics, artificial intelligence, software developments, and digital privacy trends.
