On Monday, Indonesia's benchmark stock index, the Jakarta Composite Index, fell over 5%, marking its lowest point since October 2020. This decline follows MSCI's proposal to reclassify Indonesia from an emerging market to stand-alone status, which could result in the country's removal from key global equity benchmarks.
Goldman Sachs has warned that such a downgrade could lead to approximately $5.6 billion in passive fund outflows, equivalent to 18 days of average trading volume for the MSCI Indonesia Investable Market Index. Additionally, if FTSE Russell were to take similar action, another $2.7 billion could be at risk.
Goldman Sachs estimates that active funds tied to MSCI and FTSE indexes hold over $8 billion in Indonesian equities, but any selling would be discretionary. The MSCI Indonesia Index has plummeted 47% this year, with foreign investors withdrawing a net $5.1 billion.
Foreign ownership of Indonesian stocks has decreased from 27% in January to 25% in October, and the value of foreign holdings has nearly halved from $250 billion to around $130 billion.
Despite the significant drop in valuations, Goldman cautions that Indonesian equities may not have reached their bottom, as the index's forward price-to-earnings ratio is at its lowest since the global financial crisis, yet still above historical lows. Furthermore, the central bank is expected to raise interest rates twice more, potentially impacting economic growth and equity valuations