Markets
Jakarta Stocks Rose 3% on Tuesday After a 15% Two-Day Fall, as the Exchange Moved to Strip Concentrated-Ownership Companies From Its Index
Indonesia's Jakarta Composite rose as much as 3.2% on October 20, its first gain since MSCI proposed on Friday to reclassify the country from emerging-market to standalone status, after the exchange said it would remove companies with highly concentrated ownership from the benchmark. The index had fallen 11.57% on Friday, its worst day since January 1998, and 3.64% on Monday to 4,996.6, its first close below 5,000 in six years.
The worst-performing stock market in the world this month had its first good day on Tuesday. The Jakarta Composite rose as much as 3.2% on October 20, according to Bloomberg, and was up 2.3% in the regional reports compiled by Investing.com, after two sessions that had taken it down about 15%. On Friday, October 16, the index fell 11.57%, its largest one-day decline since January 1998; on Monday it fell another 3.64% to 4,996.6, closing below 5,000 for the first time in six years.
The trigger was MSCI. On Friday the index provider proposed reclassifying Indonesia's indexes from emerging market to standalone status, and said it expected to proceed with the reclassification unless its consultation identified clear evidence of material improvements in market governance. The complaint, which MSCI had first raised in January when the index fell 7.35% in a day, is the concentration of ownership and the thin free float of some of the largest index constituents, which makes the headline index a poor description of what foreign investors can actually buy. Goldman Sachs estimated last week that a downgrade could trigger about $5.6 billion of passive outflows.
Tuesday's rebound followed what Bloomberg described as a stepped-up response from the authorities. The Indonesia Stock Exchange said it would remove companies with highly concentrated ownership from the index and tighten its free-float rules, the measure MSCI had asked for, and the government and the financial services authority signalled further governance steps. That is what a market with a known buyer's strike looks like when the seller's reason is addressed: the rebound was large in percentage terms and still left the index more than 10% below where it stood before MSCI's statement; the rupiah remained within 1% of its record low and Bank Indonesia meets on Tuesday and Wednesday.
The episode is a reminder that index membership is a price-setting event. Passive funds own emerging-market stocks because of the label; remove the label and the holding is not a decision but an obligation to sell by a date. MSCI's consultation runs into November, and its decision on Indonesia will come alongside the implementation of the rule changes it adopted last week that could remove Strategy and Metaplanet from its indexes for holding mainly bitcoin. For both, the market is pricing the outcome before the consultation ends.
For traders in the region the Jakarta rebound did nothing for the rest of Asia: the Kospi fell 2.5% the same day and the Hang Seng 1%. Indonesia's problem is specific, its remedy is specific, and a 3% rise is a start. Whether it holds depends on whether MSCI accepts the exchange's changes as material, and on whether the companies being removed from the index are also removed from the portfolios of the funds that will have to sell them.