Mirae Asset Sekuritas Flags Risks of Foreign Capital Outflows Amid MSCI Reclassification Proposal

PT Mirae Asset Sekuritas Indonesia views MSCI’s proposal to reclassify Indonesia’s equity market from Emerging Market to Standalone Market as a serious development that could have long-term implications for the domestic capital market. The issue extends beyond potential short-term selling pressure, affecting Indonesia’s position in global equity indices, access to international institutional investors, and the attractiveness of the Indonesian stock market as an investment destination.

MSCI initiated a consultation on the proposal on October 15, 2026, following concerns regarding transparency in shareholding structures, free float quality, and suspected coordinated trading activities. A final decision is expected by June 30, 2027. According to Mirae Asset Sekuritas Indonesia, these developments indicate that the challenges facing Indonesia’s equity market are not merely a matter of market sentiment, but also involve fundamental issues of transparency and market accessibility for global investors.

Rully Arya Wisnubroto, Head of Research & Chief Economist at PT Mirae Asset Sekuritas Indonesia, explained that if the reclassification to Standalone Market is implemented, Indonesian stocks could be removed from MSCI’s Emerging Market indices, which serve as benchmarks for various global investment products. This could trigger selling by passive investors tracking these indices, alongside portfolio reallocations by active institutional investors.

“The risk is not limited to the potential amount of foreign capital outflows. Over the longer term, a change in market classification could narrow the institutional investor base, reduce market liquidity, and increase the risk premium investors demand to invest in Indonesian equities. In other words, the impact could extend well beyond the selling pressure we are seeing today,” Rully explained.

Nevertheless, Mirae Asset Sekuritas Indonesia believes that the Standalone Market scenario should not yet be regarded as a foregone conclusion. The ongoing consultation period provides Indonesia’s capital market authorities with an opportunity to demonstrate tangible progress, particularly in shareholding transparency, oversight of coordinated trading activities, and the implementation of credible and consistent free float rules.

“What global investors will be looking at is not simply a commitment to improve, but the extent to which reforms are actually implemented and can be independently verified. The regulator’s response to MSCI’s concerns will therefore be a key factor in shaping investor confidence going forward,” Rully added.

From an investment strategy perspective, Mirae Asset Sekuritas Indonesia recommends a more selective approach amid heightened market volatility. Investors with relatively large cash positions may consider gradually re-entering the market, focusing on stocks with relatively low foreign institutional ownership and more limited exposure to MSCI-related selling pressure. Selected commodity stocks may also warrant attention, subject to each stock’s liquidity and individual characteristics.

“We do not believe investors need to rush back into the market aggressively. However, a sharp correction can also create selective opportunities. Under current conditions, we prefer stocks that are relatively less dependent on foreign fund flows, while maintaining sufficient cash flexibility to navigate potential further volatility,” Rully concluded.

The potential impact of MSCI’s proposed reclassification could also extend to the government bond market through shifts in investor sentiment and foreign capital flows. Mirae Asset identifies two possible directions for the impact on Indonesian government bonds, known as Surat Berharga Negara (SBN). Deteriorating sentiment toward Indonesia could increase the risk premium, put pressure on the rupiah, and prompt foreign investors to reduce their cross-asset exposure, including to SBN.

Jessica Tasijawa, Fixed Income Analyst at PT Mirae Asset Sekuritas Indonesia, noted that short-term pressure on domestic financial markets warrants close attention. The yield on 10-year SBN reportedly reached 7.33% at the market open, while the rupiah traded above IDR 18,000 per US dollar. These movements underscore the need to remain alert to ongoing market pressures.

“The earlier increase in the 10-year SBN yield to 7.24%, despite a decline in US Treasury yields, also indicated additional domestic pressure. One factor to watch is foreign exchange risk. If MSCI-related sentiment deteriorates and prompts investors to reduce their exposure to domestic assets, the conversion of investment proceeds into foreign currencies could add further pressure on the rupiah,” Jessica explained.

At the same time, a higher perception of risk may lead investors to demand higher SBN yields as compensation for investment risk. Continued rupiah depreciation could also constrain Bank Indonesia’s room to ease monetary policy, potentially limiting declines in domestic yields even if global market conditions improve.

Amid this volatility, Mirae Asset considers current SBN yields attractive for gradual accumulation, particularly at shorter maturities. This appeal is supported by a renewed widening of the yield spread between US Treasuries and Indonesian government bonds (UST–INDOGB spread) to more than 200 basis points.

Despite the attractive yields, investors should remain mindful of rupiah depreciation risks and uncertainty surrounding capital flows. For foreign investors, a weaker rupiah could erode investment returns on SBN and constrain Bank Indonesia’s room for monetary easing, potentially keeping domestic yields elevated.

Mirae Asset believes investors should remain more selective toward longer-duration bonds, which are more sensitive to yield movements, while favoring short- to medium-term maturities. Developments surrounding MSCI, rupiah stability, and domestic and foreign fund flows will continue to be monitored in determining subsequent investment strategies.