Key Takeaways
- • Jakarta Composite Index fell more than 5% on Monday to its lowest level since early October 2020, as fears of an MSCI downgrade intensified foreign outflows.
- • MSCI proposed on Friday reclassifying Indonesia directly from emerging market to stand-alone status, with a final decision expected by June.
- • Goldman Sachs estimates full removal from MSCI emerging-market indexes could trigger about $5.6 billion in passive outflows, with a further $2.7 billion at risk if FTSE Russell follows.
- • The MSCI Indonesia Index has fallen 47% year to date, with foreign investors pulling a net $5.1 billion from Indonesian equities.
- • Goldman maintains an underweight rating, citing index uncertainty, weak earnings and macro headwinds, and warns equities may not have bottomed.
Summary
Indonesia's benchmark stock index plunged more than 5% on Monday to its lowest level in six years, according to CNBC, as concerns over a potential downgrade by index provider MSCI intensified fears of further foreign investor outflows. The Jakarta Composite Index fell to its lowest level since early October 2020, extending a sharp sell-off in Indonesian equities.
The immediate trigger was MSCI's Friday proposal to reclassify Indonesia directly from an emerging market to stand-alone status, raising the prospect of the country's removal from major global equity benchmarks. MSCI is expected to make a final decision by June, with the outcome hinging on whether Indonesian authorities can demonstrate meaningful improvements in market governance and transparency.
Goldman Sachs, in a Sunday note, estimated that a full removal from MSCI's emerging-market indexes could trigger approximately $5.6 billion in passive fund outflows, equivalent to 18 days of average daily trading volume for constituents of the MSCI Indonesia Investable Market Index. A further $2.7 billion could be at risk if FTSE Russell takes similar action, though the bank stressed this would be a separate scenario. Goldman also estimated that active funds benchmarked to MSCI and FTSE indexes hold more than $8 billion in Indonesian equities, although any selling by these investors would be discretionary rather than automatically triggered.
The MSCI Indonesia Index has fallen 47% this year as of Friday, according to data provided by Goldman, with foreign investors withdrawing a net $5.1 billion over the period. Foreign ownership of Indonesian stocks declined to 25% in October from 27% in January, and the value of foreign holdings has nearly halved to about $130 billion from $250 billion.
Goldman maintained its underweight rating, citing persistent index uncertainty, weak corporate earnings and macroeconomic headwinds. Strategists led by Alvin So wrote that "valuations have compressed significantly, but remain above historical troughs; index, earnings, and macro risks constrain a re-rating." The index's 12-month forward price-to-earnings ratio has fallen to 7.3 times, its lowest since the global financial crisis, yet still above historical troughs. Goldman also expects Indonesia's central bank to raise interest rates twice more, by 25 basis points each in the fourth quarter of 2026 and first quarter of 2027, potentially adding pressure to growth and equity valuations.
The immediate trigger was MSCI's Friday proposal to reclassify Indonesia directly from an emerging market to stand-alone status, raising the prospect of the country's removal from major global equity benchmarks. MSCI is expected to make a final decision by June, with the outcome hinging on whether Indonesian authorities can demonstrate meaningful improvements in market governance and transparency.
Goldman Sachs, in a Sunday note, estimated that a full removal from MSCI's emerging-market indexes could trigger approximately $5.6 billion in passive fund outflows, equivalent to 18 days of average daily trading volume for constituents of the MSCI Indonesia Investable Market Index. A further $2.7 billion could be at risk if FTSE Russell takes similar action, though the bank stressed this would be a separate scenario. Goldman also estimated that active funds benchmarked to MSCI and FTSE indexes hold more than $8 billion in Indonesian equities, although any selling by these investors would be discretionary rather than automatically triggered.
The MSCI Indonesia Index has fallen 47% this year as of Friday, according to data provided by Goldman, with foreign investors withdrawing a net $5.1 billion over the period. Foreign ownership of Indonesian stocks declined to 25% in October from 27% in January, and the value of foreign holdings has nearly halved to about $130 billion from $250 billion.
Goldman maintained its underweight rating, citing persistent index uncertainty, weak corporate earnings and macroeconomic headwinds. Strategists led by Alvin So wrote that "valuations have compressed significantly, but remain above historical troughs; index, earnings, and macro risks constrain a re-rating." The index's 12-month forward price-to-earnings ratio has fallen to 7.3 times, its lowest since the global financial crisis, yet still above historical troughs. Goldman also expects Indonesia's central bank to raise interest rates twice more, by 25 basis points each in the fourth quarter of 2026 and first quarter of 2027, potentially adding pressure to growth and equity valuations.
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