- Indonesia's equity market experienced a significant decline of more than 8%
- There are concerns around the reduction in the weighting of Indonesian equities within EM indices
- We see the likelihood of Indonesia’s removal from EM status as unlikely
- We maintain our overweight stance on Indonesia; favour strong large caps at lower valuations
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.
Buying opportunity with Indonesia. To be sure, Indonesia has already been classified as an EM by the named index provider since the beginning of the EM index inception in 2001. Indonesia is not in an economic crisis. On the contrary, its economy has grown at around 5% in the past few years. Since the 1997 Asian financial crisis, various reforms to address domestic and external balances, including the removal of fuel subsidy reform and bond market reform, have taken place.
Our fundamental view on Indonesia remains positive, especially with large capitalisation stocks. In the worst case scenario where it is reclassified as an FM, Indonesia will still be the biggest market since it is about half the size of all FMs combined. Indonesia’s biggest bank is among the top 10 banks in Asia ex-Japan in terms of market cap. Its attractiveness lies in the market’s relatively cheap valuations, leverage from demographic dividends, and its role as a beneficiary of the current sweet spot in commodities.
Maintain overweight. We maintain our overweight stance on Indonesia and recommend investors pick up strong large cap names on lower valuations. The current JCI and LQ45 PE multiples are still below their mean. Until the dust settles and active funds revisit the country, investors should therefore still have an allocation to Indonesia
Figure 2: Indonesia equities trading at an attractive valuation
Source: LSEG, DBS
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