Jakarta's benchmark stock index plummeted over 5% on Monday, marking its lowest point in six years. This sharp decline was fueled by escalating concerns about a potential reclassification by MSCI, a leading index provider, which could trigger significant foreign investor outflows.
The Jakarta Composite Index (JCI) hit its weakest level since October 2020, continuing a steep sell-off in Indonesian equities. MSCI announced on Friday a proposal to reclassify Indonesia from an emerging market to a standalone status. This move raises the specter of Indonesia's exclusion from major global equity benchmarks, a prospect that has unnerved the market.
MSCI is slated to make a final decision on the reclassification by June. The outcome is expected to depend on whether Indonesian authorities can effectively demonstrate tangible improvements in market governance and transparency. If the reclassification proceeds, Goldman Sachs estimates that passive fund outflows could reach approximately $5.6 billion, an amount equivalent to 18 days of average trading volume for constituents of the MSCI Indonesia Investable Market Index. An additional $2.7 billion could be at risk if FTSE Russell adopts a similar stance, though Goldman Sachs noted this would be a separate consideration.
While active funds benchmarked to MSCI and FTSE indexes hold over $8 billion in Indonesian equities, any selling by these investors would be discretionary rather than automatically mandated. Goldman Sachs reiterated its 'underweight' rating on Indonesian equities, citing ongoing index uncertainty, disappointing corporate earnings, and macroeconomic challenges. Strategists at Goldman Sachs, led by Alvin So, noted that while valuations have significantly compressed, they remain above historical lows, and risks related to the index, earnings, and macroeconomics continue to constrain a potential re-rating.
Data from Goldman Sachs revealed that the MSCI Indonesia Index had fallen 47% year-to-date as of Friday. Foreign investors have withdrawn a net $5.1 billion from Indonesian equities during this period. Foreign ownership of Indonesian stocks has dwindled to 25% in October from 27% in January, with the value of foreign holdings nearly halving from approximately $250 billion to about $130 billion.
Despite the substantial declines, Goldman Sachs cautioned that Indonesian equities might not have reached their bottom. The MSCI Indonesia Index's 12-month forward price-to-earnings ratio has dropped to 7.3 times, the lowest since the global financial crisis, yet it still exceeds historical trough levels. Furthermore, the strategists anticipate Bank Indonesia will raise interest rates twice more, by 25 basis points each in the fourth quarter of 2026 and the first quarter of 2027, which could exert additional pressure on economic growth and equity valuations.
