(Jan 29): Indonesian equities plunged deeper into turmoil on Thursday, with an MSCI Inc warning over market investability sparking the worst two-day rout in nearly three decades.
The benchmark Jakarta Composite Index tumbled as much as 10% after trading resumed following a brief 30-minute halt. The decline, which came as analysts cut their ratings, followed the index compiler’s caution over transparency and the limited amount of stock available for trading in listed companies.
The next circuit breaker will be triggered at a 15% decline, prompting another 30-minute suspension, according to exchange rules. If Thursday’s losses are sustained, benchmark stocks may enter a technical bear market.
Goldman Sachs Group Inc and UBS AG both cut their recommendations, with the former adding that more than US$13 billion in outflows could be triggered in an extreme scenario. The concerns centre on the low free float of Indonesian equities, with the market’s biggest companies thinly traded and controlled by a handful of wealthy individuals — a structure that investors say distorts the index and risks manipulation.
“We think overhang on the overall market will likely persist until we get clarity on regulations and MSCI’s reassessment,” UBS analysts including Sunil Tirumalai wrote in a note.
See also: Indonesian stocks plunge 7% after MSCI warning on investability
The angst also hit the local currency, with the rupiah down as much as 0.5% against the dollar, its biggest fall since October and trailing Asian peers.
Indonesian regulators have pledged to meet the call for greater transparency, and have until May when MSCI reassesses the country’s market accessibility status. If MSCI deems there’s not enough progress, it could reduce Indonesia’s weighting in its indexes and even downgrade the nation from emerging market.
The recent episode comes after months of consultation following MSCI’s proposal last year to tighten the definition of free float. MSCI had said it was considering an alternative data source, the Indonesia Central Securities Depository, also known as KSEI, to assess actual tradable shares. In its statement on Wednesday, MSCI said that many investors raised “significant concerns” about relying on this data set.
See also: MSCI rule shift may spur US$2 bil exit from Indonesian stocks
“Based on what’s been disclosed so far, the discussion around KSEI has mainly been about concerns over aspects of its data methodology, but there hasn’t been enough detail to draw firm conclusions yet,” said Bloomberg Intelligence Strategist Sufianti. “So for now, it’s very much a wait-and-see in terms of what actions might follow.”
Even before this week’s rout, foreign investors had already turned cautious, selling a net US$192 million worth of stocks in the week ended Jan 23, which was the first outflow in 16 weeks. Overseas investors offloaded a net 6.2 trillion rupiah (US$371 million or $470 million) of local shares Wednesday, the most since April 16, according to exchange data.
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