Indonesia’s Rebalancing Fears
Indonesia's equity market experienced a significant decline of more than 8% following the index provider’s latest free float assessment of local securities. The assessment highlighted concerns ...
Chief Investment Office - Hong Kong version30 Jan 2026
  • Indonesia's equity market experienced a significant decline of more than 8% following the index provider’s concerns regarding its transparency and low liquidity
  • Failure to implement mitigating actions by May 2026 could lead to a reduction in the weighting of Indonesian equities within EM indices, and potentially a reclassification of the country's market status from EM to FM
  • While we view Indonesia’s removal from EMs as unlikely, in the worst-case scenario where it is reclassified into FM, Indonesia will be the biggest market since it is about half the size of all FMs combined. Investors will still have a meaningful allocation to Indonesia
  • We maintain our overweight stance on Indonesia and recommend investors pick up strong large cap names at lower valuations
  • Their attractiveness lies in strong 2026 earnings growth, driven by domestic factors, relative cheap valuations, demographic dividends, and benefitting from its current sweet spot in commodities
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Indonesia's equity market experienced a significant decline of more than 8% following the index provider’s latest free float assessment of local securities. The assessment highlighted concerns regarding the transparency of shareholding structures and other trading practices, prompting the agency to call for improvements. While an interim freeze on certain index-related changes is in effect, the index provider has set a deadline of May 2026 for relevant reforms. Failure to implement mitigating actions could lead to a reduction in the weighting of Indonesian equities within emerging market (EM) indices, and potentially a reclassification of the country's market status from EM to frontier market (FM). Despite Indonesia equities expected to register the strongest 2026 earnings growth in ASEAN, driven by domestic factors and offering healthy dividend yields, the near-term outlook remains pressured by concerns over a potential downgrade in the market status.

We believe the sell-off as a result of the confusion has been stamped out. The index provider’s plan, announced last year, to review the free float classification, may have also hindered major inflows. This has led to relatively low foreign ownership after persistent foreign investor outflows in 2025. Indonesia’s largest bank has announced IDR5tn in share buyback plans, and other large conglomerates have existing share buyback plans, which may be triggered. The Financial Services Authority (OJK) has also responded promptly, announcing a minimum free float requirement of 15% for public companies.

What can happen with the reclassification? There has been precedence in the past that countries have been downgraded from EM to FM status by major index providers. These downgrades usually occur when a country's stock market fails to meet the required criteria for size, liquidity, or accessibility for foreign investors.

As an illustration, the most recent example of an EM to FM downgrade was with Pakistan in Sep 2021. The decision was driven by the Pakistan equity market no longer meeting the minimum size and liquidity standards for EMs, following a previous promotion to EM status in 2017. Pakistan’s equity market experienced a significant decline by 13% over a month. However, the equity market has seen a remarkable recovery, more than tripling in value since 2023. This robust performance is largely attributable to the nation's successful economic turnaround from its 2023 crisis. Key factors underpinning this recovery include the securing of IMF programs, the implementation of stringent fiscal and monetary policies to combat high inflation, and the subsequent stabilisation of its currency.


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