Indonesian stock market crashes 10% after MSCI reclassifies it to standalone market status

The Indonesian benchmark index, JKSE, or Jakarta Stock Exchange Composite, plunged over 10% on Friday after MSCI reclassified Indonesian indices as a standalone market status from emerging markets. The move has sent shockwaves across Indonesian capital markets, causing the benchmark index to plunge over 10%.

Here is what MSCI has proposed?

The latest proposal by MSCI proposes to reclassify Indonesian indexes from emerging markets to standalone market status. Furthermore, MSCI will also continue to apply the existing freeze on certain index-related changes for Indonesian securities from index reviews or corporate events until further notice. However, MSCI has asked for feedback on reclassification from market participants, and consultations are open till April 30, 2027, and it will announce the decision on June 30, 2027.

What does it mean for Indonesian equity markets?

The new reclassification from emerging market status to standalone market status means a massive outflow of funds from Indonesian equities, as funds tracking the EM index will be prompted to exit the equities according to the new changes, leading to sharp market reactions. Consequently, the benchmark Indonesian index plunged over 10% for the first time since the 1998 Asian Financial Crisis and prompted a trading halt. UBS estimates the move could trigger approximately $4 billion in passive outflows and $15 billion in active fund outflows.

Key drivers behind the move

MSCI’s move to reclassify Indonesian equities away from Emerging Market status stems from the concerns raised and warnings issued to Indonesian authorities over market irregularities. Poor governance and authorities failing to address the market manipulation concerns have deteriorated investability in the Indonesian markets. Amid irregularities, investors have complained about consistent market manipulation through coordinated trading practices. Severe transparency issues persisted in concentrated shareholding and opaque ownership structures.

Worst performer in Asia

Besides the internal factors, Indonesian markets have delivered extremely poor performance over the long term, medium term, and short term period. Over five years, JKSE fell 21%, followed by -35% returns in one year and -14.6% in the current week. The high underperformance comes at a time when the other Asian markets like Korea and Hong Kong have delivered stellar returns in the same period.

Disclaimer: This article is purely for informational purposes and should not be considered investment advice from Upstox. Please consult with a financial advisor before making any investment decisions.