Hey Reader,
Bad headlines and a de-risked market can be the same market at the same time.
A week ago I wrote about Indonesia's threatened MSCI downgrade and the record fine on Sinar Mas linked companies. Since then the newsflow has only gotten louder. However, I think almost everyone reading it is drawing the wrong conclusion.
The enforcement is real
Indonesia's Financial Services Authority (OJK) has spent the last few weeks doing something it has not done consistently before: enforcing its rules against some of the most powerful groups in the market.
I think OJK and the exchange now realize MSCI is dead serious about its warning on Indonesia's market status, and that real enforcement is required, not just legislation on paper. They seem to be acting on that realization rather than sitting on it.
There is a second mechanism at work that gets less attention than it should. OJK and the political leadership understand the connection between the stock market and the rupiah. Increased large-scale selling out of Indonesian equities would put additional unwelcome pressure on the rupiah - a cost the political decision makers want to avoid. It is as much a currency story as a market integrity one, which is a connection most people writing about this are missing.
There is also an interesting political pattern underneath this. President Prabowo has consistently regulated, pushed and irritated Indonesia's most powerful conglomerates during his term. The fact that MSCI's requested visible enforcement push requires the regulator/IDX to go after those same conglomerates, is an interesting and conspicuous dynamic. In the extreme scenario, they have pre-aligned on this and at the very least there is actually high-level alignment of purpose herein between the administration and MSCI. The recent willingness shown to aggressively fine listed names connected to these conglomerates (the Sinar Mas linked DSSA, BREN and CUAN among them) fits that pattern well. Prabowo, the capital markets regulator (OJK), and the stock exchange have now all shown that they are ready to enforce vigorously (which is exactly what MSCI has said that they need to see to retain the emerging markets status for Indonesia). I don't see any reason why this would now change all of a sudden.
Headlines versus pricing
Most people reading Indonesia headlines right now see instability. I think that is a misread.
People are confusing bad newsflow around the MSCI process with an inevitable bad outcome for the market. Those are not the same thing, but the investors (particularly foreign ones) are now so shaken that they rather "shoot first and ask questions later". To quite a large extent, there's also institutional forced selling going on here as many emerging market funds would not be able to stay invested in case Indonesia would turn into a frontier- or standalone-market status. To avoid an outcome where they must dump all their Indonesian holdings overnight, they are rather selling the rumor than looking at the underlying facts of the case. Buying into forced institutional & mechanical selling is usually a very strong enabler of outsized long-term returns.
After the Indonesian stock market index being down c. 40% from earlier in the year, pricing/valuation-wise, I struggle to see much downside from here. From that perspective, the Indonesian stock market is actually deeply de-risked at the moment to invest in.
Meanwhile, most institutional investors are looking at this market as the riskiest it has ever been. That is the opposite of how I think about risk. A market gets riskier as its price goes up relative to its fundamentals, not as the price swings increase and its media headlines get louder and more negative.
Low valuations are the ultimate de-risker for a stock market, and Jakarta in 2026 is not an exception.
Indonesia is already a core market for us, and we are increasing our exposure as we speak.
Key to follow
Whether OJK actually collects the fines it has announced over the coming months, not just announces new ones. We track this with AI so that we capture the full news flow and the numerical size of the enforcement.
We still think Indonesia is on the path to retaining its emerging market status and is taking the steps needed to get there. At the same time, we do not blame MSCI for taking this action. It was probably necessary to provide the political cover to really push through the changes needed.
Christopher B. Beselin
Investing, compounding & exiting
Schedule an emerging market investment review? If you are a qualified professional investor and are not sure where to begin structuring your emerging market exposure, feel free to schedule a 1 to 1 emerging market strategy call with me via this link. DS.
Christopher B. Beselin is the Chief Investment Officer of Endurance Capital. The views and opinions expressed in this newsletter are for informational and educational purposes only and should not be considered investment advice.
