Selling accelerated after MSCI floated moving Indonesia directly to stand-alone classification from emerging market. On Monday, the Jakarta Composite Index sank over 5% to a trough not seen since early October 2020, prolonging a punishing run for domestic shares. MSCI's decision is expected by June and depends on whether authorities can show meaningful upgrades to how the market is governed and how transparent it is.
Goldman Sachs put rough dollar amounts on the risks. The bank said being fully taken out of MSCI's emerging market indexes could unleash around $5.6 billion from passive vehicles, roughly the equivalent of about 18 days of average trading in names inside the MSCI Indonesia Investable Market Index. It added that a further $2.7 billion might be exposed if FTSE Russell took a similar step, though that would be a separate scenario. Goldman also estimates that active managers linked to MSCI and FTSE yardsticks collectively own in excess of $8 billion in Indonesian equities, with any disposals driven by choice instead of index rules.
Goldman kept Indonesian equities at underweight, pointing to ongoing index uncertainty, soft earnings, and macro headwinds. Strategists led by Alvin So wrote, "Valuations have compressed significantly, but remain above historical troughs; index, earnings, and macro risks constrain a re-rating." This year through Friday, the MSCI Indonesia Index is down 47%, while foreign investors have pulled a net $5.1 billion. Foreign ownership slipped to 25 percent in October from 27 percent in January, and the market value of those holdings has nearly halved to about $130 billion from $250 billion.
Despite the drawdown, Goldman said the market may not have found a floor. The index's forward 12 month P E multiple has fallen to 7.3 times, the lowest since the global financial crisis, yet still not at past bottoms.
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Goldman's baseline for Bank Indonesia assumes two further increases - each of 25 basis points - one slated for the fourth quarter of 2026 and another in the first quarter of 2027 - which could add pressure to growth and equity valuations. For holders of Indonesian exposure, the near term picture is a three-way tug between index classification risk, mechanical passive flows, and a still-tightening rate path.
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