Indonesia’s stock market has plummeted to a six-year low, fueled by growing concerns over a potential reclassification by MSCI from an emerging market to standalone status. This downgrade could trigger significant foreign investor outflows, with Goldman Sachs estimating around $5.6 billion in passive fund withdrawals alone. Analysts warn that despite the steep declines, the market may not have bottomed, as macroeconomic headwinds and further interest rate hikes loom.
Indonesia's benchmark stock index suffered a dramatic fall on Monday, plummeting over 5% to reach its lowest point in six years. This steep decline ignited fresh fears among investors regarding substantial foreign capital outflows, driven by the increasing likelihood of a downgrade from major index provider MSCI.
The Jakarta Composite Index has not seen such lows since early October 2020, extending a period of significant selling pressure on Indonesian equities. The market jitters intensified after MSCI announced on Friday a proposal to reclassify Indonesia directly from its emerging market status to a standalone market. Such a move raises the very real prospect of Indonesia's exclusion from prominent global equity benchmarks, triggering automatic sell-offs from passive funds.
MSCI is slated to deliver its final verdict by June. The potential reclassification hinges critically on whether Indonesian authorities can demonstrate tangible progress in enhancing market governance and transparency – factors that are currently under close scrutiny.
In a stark warning issued Sunday, Goldman Sachs analysts highlighted the severe implications of such a downgrade. They estimated that a complete removal from MSCI’s emerging-market indexes could precipitate roughly $5.6 billion in passive fund outflows. To put this into perspective, this sum is equivalent to about 18 days of average daily trading volume for the constituents within the MSCI Indonesia Investable Market Index.
Adding another layer of concern, an additional $2.7 billion could be at risk if FTSE Russell, another influential index provider, decides to follow suit. However, Goldman Sachs clarified that this would be a separate, independent scenario. While active funds benchmarked to both MSCI and FTSE indexes collectively hold over $8 billion in Indonesian equities, any selling from these investors would be at their discretion, rather than an automatic consequence of a downgrade.
Goldman Sachs has maintained its 'underweight' rating on Indonesian equities, citing a confluence of persistent index uncertainty, disappointing corporate earnings, and broader macroeconomic headwinds.
"While valuations have compressed significantly, they still hover above historical troughs," Goldman strategists, led by Alvin So, noted. "Index, earnings, and macro risks continue to constrain any potential re-rating."
Data from the bank reveals that the MSCI Indonesia Index has already slumped by 47% this year as of Friday. During the same period, foreign investors have pulled a net $5.1 billion from Indonesian equities. Foreign ownership of Indonesian stocks has fallen from 27% in January to 25% by October, with the total value of foreign holdings nearly halving from approximately $250 billion to $130 billion.
Despite these significant declines, Goldman Sachs cautioned that Indonesian equities might not have reached their bottom yet. The MSCI Indonesia Index's 12-month forward price-to-earnings ratio, currently at 7.3 times, is at its lowest since the global financial crisis but still remains above its historical lows.
Furthermore, strategists anticipate that Indonesia’s central bank will implement two more interest rate hikes, each by 25 basis points, in the fourth quarter of 2026 and the first quarter of 2027. Such moves could potentially exert further downward pressure on economic growth and equity valuations, compounding the challenges faced by the Indonesian market.
