Indonesia’s stock market fell almost 12% on Friday – its biggest one-day decline since January 1998 – following MSCI’s decision to launch a consultation on reclassifying the country from Emerging Market to Standalone Market status. The index provider cited “persistent opacity in shareholding structures and suspected coordinated trading behaviour” as reasons for the review which is expected to conclude by the end of June 2027.
The move took investors by surprise and Indonesian authorities responded with sanctions, further investigations and a briefing on recent reform progress, while also planning to seek clarification from MSCI on the downgrade. The benchmark Jakarta Composite Index fell a further 4% on Monday, however, further cementing Indonesia’s position as the world’s worst-performing stock market this year with the index now down over 40% in local currency.
A double downgrade – bypassing Frontier Market status altogether – is highly unusual. It would put Indonesia alongside markets such as Argentina, Nigeria and Ukraine and make it the only standalone market in Asia. Previous demotions to standalone status, including Sri Lanka in 2001 and Pakistan in 2008, were driven by concerns over market access – liquidity, the size of the investable universe and foreign ownership limits – and Indonesia would be the first market demoted for governance-led reasons.
Real concerns, real progress
SKAGEN Kon-Tiki currently has just under 2% of the portfolio invested in Indonesia. We visited the country in early September and met a number of well-run, blue-chip companies, including the largest banks, telecoms operators and consumer businesses. We also had detailed discussions with the management of the stock exchange, representatives of the Ministry of Finance and Danantara, the state investment agency that now oversees Indonesia’s state-owned companies.
We view the situation seriously but believe that MSCI’s issues are less relevant to the parts of the market and the types of companies in which we invest. Our meetings left us with the clear impression that Indonesia is taking steps to address the concerns raised by MSCI and foreign investors, and that real progress has been made. Since January, regulators have required disclosure of shareholders owning more than 1%, set out a roadmap towards a 15% minimum free float and expanded a list of stocks with highly concentrated ownership to 84 companies, all of which are now excluded from key local indices. These efforts came amid FTSE Russell reaffirming the country’s emerging market status earlier this month.
The outstanding issues are as much economic as regulatory, in our view. Inflation and interest rates are high and, as a net importer of energy reliant on remittances, Indonesia has been hit hard by the knock-on effects of the conflict in the Middle East. This has been exacerbated by high government spending, putting pressure on state finances. Putting state finances on a sustainable footing requires better performance from state assets, which is why we see the steps taken by Danantara to professionalise the management of state-owned companies as positive, both for the Indonesian economy and for minority shareholders.
Contrarian opportunity
Investors have responded by selling, and in large volumes. Foreign investors have pulled over US$5.0 billion net from Indonesian equities this year, on course for the largest annual outflow on record. The country’s weight in the MSCI Emerging Markets Index has fallen from 1.2% at the start of the year to around 0.4% today, a period over which the MSCI Indonesia Index has lost around half of its members.
Data from Copley Fund Research shows that active emerging market managers cut their average Indonesian exposure from over 3% to under 1% by the end of September. The retreat is reflected in depressed valuations. The MSCI Indonesia index trades on 8.5x forward earnings and 1.4x book value – levels last seen during the global financial crisis and around 50% below pre-covid multiples.
We have been underweight Indonesia for the last four years and began building positions in 2026. Our exposure comes mainly through Telkom Indonesia, the country’s largest telecoms operator, and Bank Mandiri, its largest bank, both bought this year. The pair are attractive on a risk/reward basis as both benefit from the state-owned enterprise reform agenda, with Danantara as controlling shareholder, and have leading positions in their respective markets.
Telkom has a dominant position outside Java and sector-leading profitability, and its management has a clear mandate to improve efficiency, divest non-core assets and crystallise value. Industry structure has also improved, with recent consolidation leaving just three mobile operators. Elsewhere, three-player markets have tended to deliver more rational competition, higher profitability and better services than more fragmented ones. In Bank Mandiri’s case, we believe state backing results in more stable funding and asset quality. Both companies are cash generative and remain committed to shareholder returns, with dividend yields currently above 10%.
We are monitoring the situation closely. CLSA estimates that a move to standalone status could trigger around US$4.5 billion of further passive outflows, roughly 60% of it from large banks including Mandiri, while noting that active outflows are typically two to three times larger. Volatility is likely to persist until MSCI announces its decision, which could provide further buying opportunities.
A sharp drawdown driven by market-wide issues tends to drag down well-run companies alongside poorly run ones. As others are forced to sell at any price, we can take our time to look through what they leave behind and pick up bargains less affected by the market’s issues. While we profess no particular insight to MSCI’s final decision due June 2027, we believe that the market reaction to date indicates many investors fear the worst and have headed for the exits. Our focus remains on company fundamentals – if they hold up, we can be patient and invest ahead of any improvement in sentiment. Many of the fund’s most successful investments have been made in times of similar market turmoil – as active and value-based, contrarian investors with a long-term horizon, we hope to capitalise on the types of market dislocations currently affecting Indonesia.