Thai stock market stands to benefit from Indonesia's woes

A SIGNIFICANT development that could shake the stock market has occurred with MSCI having announced that it is seeking feedback on a proposal to reclassify the Indonesian stock market from an “Emerging Market” to a “Standalone Market” and it appears the Thai bourse could benefit from this action, PPTVHD36 said this evening (Oct. 19)

This move stems from concerns regarding the transparency of shareholding structures and trading practices, which could undermine foreign investor confidence and put the Indonesian market at risk of losing capital from funds that track global indices.

Although Indonesian regulatory authorities have announced measures to enhance transparency, there is currently no clear evidence that these actions have led to a significant and sustained improvement in market operations.

MSCI’s primary concerns centre on the lack of transparency in shareholding structures and questions surrounding trading behaviours—issues that could affect the assessment of a company’s “free float” (the portion of shares available for trading by the general public) as well as the overall reliability of stock prices.

Previously, MSCI had already suspended certain adjustments related to Indonesian securities within its indices, citing a need to mitigate risks arising from insufficient data while providing an opportunity for relevant authorities to tighten measures regarding capital market transparency.

However, MSCI will announce its final decision by the end of June 2027. The potential status reclassification is currently undergoing a public consultation process, and the proposal could be reviewed if clear evidence emerges that governance and market operations have significantly improved.

Could Thai stocks receive an “unexpected windfall?”

Asia Plus Securities said that the Thai stock market has outperformed global markets, suggesting a potential “windfall” in terms of fund flows. The SET Index has delivered a year-to-date (YTD) return of +24.9%, demonstrating greater strength than global markets overall.

The firm believes the Thai market could benefit from an influx of capital if MSCI reclassifies the Indonesian stock market from “Emerging Market” status to “Standalone Market” by June 2027 because capital from funds tracking the MSCI EM index would be redistributed among other countries within the group.

Thailand, which holds a 0.9% weight in the MSCI EM index, could see a significant inflow of funds—particularly into large-cap, highly liquid stocks such as DELTA, ADVANC, PTT, GULF, CPALL, AOT, PTTEP, BDMS, and major commercial banks.

The fate of Indonesian stocks: A sharp decline and the risk of capital outflows

This issue has sparked concern among investors and severely impacted the Indonesian stock market. According to Reuters, the Jakarta Composite Index plummeted by more than 5% today (Oct. 19), hitting a six-year low. This followed an 11.6% drop on Friday (Oct. 16), marking one of the most intense sell-offs seen in decades.

Goldman Sachs estimates that if Indonesia were to be fully removed from the MSCI Emerging Markets Index, passive funds could withdraw approximately US$5.6 billion from the Indonesian stock market—an amount equivalent to 18 days of average daily trading volume for stocks included in the MSCI Indonesia Investable Market Index.

Furthermore, an additional US$2.7 billion in investments could be at risk if FTSE Russell were to take similar action regarding Indonesia’s market status. Goldman Sachs notes, however, that such a scenario would be separate from the decision made by MSCI.

As for active funds that use MSCI and FTSE indices as benchmarks, they hold a combined total of over US$8 billion in Indonesian equities. Whether these funds sell their holdings, however, depends on the decisions of individual fund managers rather than occurring automatically as a result of a change in index status.

Indonesia acts to address issues and restore confidence

Indonesian regulatory authorities have announced a series of measures aimed at enhancing transparency within the capital market. These measures include disclosing information on shareholders with holdings exceeding 1%, providing a more granular classification of investors, monitoring the concentration of major shareholders, and implementing a plan to raise the minimum free-float requirement to 15%.

However, MSCI has noted that international institutional investors are looking for more than just the announcement of such measures; they require consistent enforcement and evidence that these steps effectively address market issues. This presents a critical challenge for Indonesia: if the country fails to build confidence in its corporate governance and transparency, a change in its index classification could hinder access to global capital and exert further pressure on its stock market.

Meanwhile, Goldman Sachs maintains an “underweight” position on Indonesian equities, citing uncertainty regarding the country’s index status, weak corporate earnings, and macroeconomic headwinds as significant risks—even though valuations have already declined substantially.

The case of Indonesia underscores the importance of market classification by global index providers in the context of international capital flows, as many investment funds use these indices as benchmarks for their asset allocation. Should Indonesia be reclassified, effectively removed from the emerging markets category, there is a risk of further capital outflows from index-tracking funds, though no final decision on its status has been reached.

The future direction of the Indonesian stock market will depend on the ability of regulatory authorities to demonstrate that capital market reforms are yielding tangible results, specifically regarding the disclosure of shareholder information, the prevention of market-distorting trading practices, and the effective enforcement of regulations.

Consequently, investors should look beyond the extent of the decline in Indonesian stock indices and instead focus on decisions made by MSCI, as well as progress in capital market reforms. These factors will be critical in shaping market confidence and the trajectory of foreign capital flows moving forward.

CAPTIONS:

Top and Front Page: A graphic image showing the Indonesian flag and stocks sliding. Credit – PPTVHD36

Insert: Indonesian stock market plunged heavily today. File photo – Reuters and published by PPTVHD36

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