Indonesia Stocks Slump to Six-Year Low as MSCI Downgrade Fears Mount

Indonesia's benchmark Jakarta Composite Index tumbled more than 5% on Monday to its weakest level in six years, deepening a selloff across the country's equities. The index touched its lowest point since early October 2020, with anxiety over a possible MSCI downgrade adding to fears of further foreign investor outflows. MSCI proposed on Friday that Indonesia be reclassified directly from emerging-market to standalone status, raising the prospect of its removal from major global equity benchmarks. The index provider is expected to make a final decision by June, contingent on whether Indonesian authorities can demonstrate meaningful progress on market governance and transparency. In a note published Sunday, Goldman Sachs warned that a full exit from MSCI's emerging-market indexes could trigger roughly $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 should FTSE Russell take similar action, though Goldman framed that as a separate scenario. Active funds benchmarked to MSCI and FTSE indexes hold more than $8 billion in Indonesian equities, by Goldman's estimate, and selling by those investors would be discretionary rather than automatically triggered by a downgrade. The bank maintained an underweight rating on Indonesian stocks, citing persistent index uncertainty, weak corporate earnings and macroeconomic headwinds. Strategists led by Alvin So said valuations had fallen significantly but stayed above historical lows, with index, earnings and macroeconomic risks limiting any increase in valuations. Goldman data shows the MSCI Indonesia Index down 47% this year as of Friday, with foreign investors withdrawing a net $5.1 billion from Indonesian equities over that period. Foreign ownership of Indonesian stocks slipped to 25% in October from 27% in January, and the value of foreign holdings nearly halved, to about $130 billion from $250 billion. Despite the steep declines, Goldman cautioned that Indonesian equities may not have reached their lowest point. The MSCI Indonesia Index's 12-month forward price-to-earnings ratio has fallen to 7.3 times, its lowest since the global financial crisis, though the multiple remains above historical lows. Goldman strategists expect Indonesia's central bank to raise interest rates twice more, by 25 basis points each, in the fourth quarter of 2026 and the first quarter of 2027. Those increases could add further pressure on economic growth and equity valuations.