Big issue: A display shows market information in the Indonesia Stock Exchange in Jakarta. MSCI’s concerns about the tightly held ownership of listed firms is shaking Indonesia’s equity market. — Bloomberg
Jakarta: Indonesian stocks have tumbled after MSCI Inc raised concerns about their investability and warned of a potential downgrade to frontier-market status.
The benchmark Jakarta Composite Index (JCI) fell as much as 7% yesterday, the biggest one-day slump in more than nine months.
Among the biggest decliners were stocks widely expected to enter MSCI’s gauges in next month’s review, including PT Bumi Resources, PT Petrosea, and PT Pantai Indah Kapuk Dua, all of which were down about 15%.
The sell-off comes after the index compiler said it would immediately pause some index changes, including additions, until regulators address concerns over tightly held ownership of listed firms.
The move is due to “fundamental investability issues” and investor worries over coordinated efforts to distort prices, MSCI said in a statement.
If Indonesia fails to make sufficient progress on transparency by May, MSCI will reassess the country’s market accessibility status – a move that could lead to a reduction in weighting for all Indonesian companies in the MSCI Emerging Markets Index and even a potential downgrade to frontier-market status.
Indonesia’s exchange operator said that it will continue discussions with MSCI along with the local regulators on data transparency to reach a consensus.
It had already taken steps to boost transparency by publishing free float data on the bourse’s website, it added.
“MSCI’s freeze is a warning shot, not a verdict,” said Tareck Horchani, head of prime brokerage dealing at Maybank Securities in Singapore. “Markets have already started pricing some probability of a negative outcome, which explains the pressure we’ve seen on index-heavy Indonesian names.”
Global investors sold a net US$192mil worth of local stocks in the week ended Jan 23, marking their first outflow in 16 weeks. They remain net sellers so far this week.
The decision follows MSCI’s earlier proposal to tighten the definition of free float – the number of shares available for trading and a key determinant of a stock’s weighting in benchmarks – for Indonesian securities.
The firm said it was considering an alternative data source to assess actual free float, and if companies are found to have even smaller figures than reported, passive funds would be forced to cut existing positions.
Free float concerns have emerged as a flashpoint in Indonesia’s US$976bil stock market in recent years, as investors lament that the nation’s biggest companies are thinly traded and controlled by a handful of wealthy individuals.
Such concentrated ownership often leads to sharp price swings, masks market performance and heightens the risk of manipulation.
Regulators have sought to ease concerns with plans to raise minimum float levels to between 10% to 15% from the current 7.5% level.
The longer-term goal is 25%, though no timeline has been set.
That compares to Hong Kong and India’s 25% rule and Thailand’s 15%.
That dislocation is most evident through the widening gap between the JCI and the MSCI Indonesia Index, with the former outperforming the latter by a record margin last year.
Prior to yesterday’s rout, Indonesian stocks trailed their South-East Asian peers at the start of the year as the local stock gauge rose 2.7% compared to MSCI Asean Index’s 5.3% surge.
If Indonesia is downgraded, the impact on passive flows would be significant, according to Yiping Liao, portfolio manager at Franklin Templeton Global Investments. “Foreign participation in the Indonesian market has dropped significantly because of concerns about macro and policy. Not assuming any other sort of changes around it, it’s certainly not positive.”
The latest move may also deepen worries about Indonesia’s economic trajectory, with investor confidence already fragile following President Prabowo Subianto’s efforts to steer fiscal and monetary policies toward his growth goals.
Markets were rattled earlier by the dismissal of long-serving Finance Minister Sri Mulyani Indrawati last year and Prabowo’s growing sway over the central bank. — Bloomberg
