While Asia-Pacific equity markets generally underwent leverage unwinding and consolidation in July, the Indonesian stock market staged a remarkable counter-trend rally—surging 10.5% in a single month after touching five-year lows in the first half of the year. Entering technical bull market territory, the Jakarta Composite Index (JCI) has kicked off a major valuation re-rating.
From Panic Selling to Valuation Re-Rating
The Indonesian market endured severe headwinds in 1H 2026, driven by continuous foreign capital outflows, drying market liquidity, corporate governance concerns, and lingering threats of an MSCI downgrade. At its nadir, the JCI suffered a cumulative maximum drawdown of nearly 30%, making it one of Asia’s worst-performing benchmarks as panic selling hit heavyweights across the financial, consumer, and infrastructure sectors.
However, after the steep sell-off, valuations for industry leaders dropped significantly below historical averages, trading at a distinct discount compared to regional emerging market peers. This steep asymmetric risk-reward profile attracted value-oriented institutional investors back to re-evaluate Indonesia’s long-term thesis, triggering a sharp value re-rating rally.
MSCI Retains Emerging Market Status
This year, MSCI began reviewing the Indonesian market in terms of liquidity, market structure, and free float ratio. The market was once extremely concerned that Indonesia might be downgraded from an “Emerging Market” to a “Frontier Market.” If downgraded, passive funds tracking the benchmark index would be forced to sell Indonesian stocks, with potential foreign capital outflows estimated to reach as high as 13 billion USD. Fortunately, MSCI ultimately decided to postpone the downgrade and maintain Indonesia’s status as an emerging market. This move significantly alleviated systemic risk, prompting a rapid covering of short positions and becoming the key catalyst for the strong rally in July.
Foreign Capital Reversal & Fiscal Discipline Reassurance
Indonesia’s stock and foreign exchange markets faced significant capital outflow pressure in the first half of this year. Constrained by resource nationalism policies—including tightening nickel ore quotas, raising mineral prices, and restricting resource exports—foreign investors grew concerned about operating costs and the repatriation of funds. Coupled with soaring international oil prices threatening the fiscal deficit, the market even feared a downgrade of the sovereign credit rating. Multiple negative factors led to foreign investors withdrawing over 3.5 billion USD in the first half of the year, the Indonesian rupiah depreciated by more than 7%, and foreign exchange reserves recorded their first “five consecutive months of decline” since 2018.
The flagship policy promoted by President Prabowo Subianto, the “Free Nutritious Meal (MBG)” program, initially sparked market panic due to fears it would crowd out education budgets and cause uncontrolled deficits. In July, the Constitutional Court made a landmark ruling, strongly mandating that MBG funds must be strictly separated from the national education budget. This move was seen by the capital market as a major victory for the new government in defending fiscal discipline and the rule of law, effectively dispelling warnings of debt expansion.
As policy uncertainty subsided, foreign capital rebounded in July with net purchases of about 16.2 trillion Indonesian rupiah. Although the absolute amount was not large, the symbolic significance was very strong. The Financial Services Authority of Indonesia (OJK) also confirmed that overall market liquidity has substantially improved and investor confidence is rapidly recovering.
Structural Governance Reforms & Sovereign Credit Stability
For a long time, the Indonesian stock market has been constrained by structural defects such as excessive concentration of family-owned shares, insufficient free-floating shares, and relatively low transparency. In recent months, regulatory authorities have actively promoted reforms, including raising the free float share ratio requirements and strengthening equity disclosure regulations, boosting the confidence of international institutional investors to replenish their holdings. Additionally, earlier market concerns about government spending expansion potentially eroding fiscal health have been alleviated. The international credit rating agency Standard & Poor’s (S&P) believes that Indonesia’s improved tax revenue and stable debt structure make fiscal risks fully controllable. S&P confirmed maintaining Indonesia’s BBB investment-grade rating with a “stable” outlook, stabilizing both the Indonesian bond and foreign exchange markets and dispelling foreign investors’ concerns about overall economic risks.
From the perspective of global asset allocation, over the past year, global capital has been highly concentrated in AI, U.S. tech giants, and the Taiwanese semiconductor supply chain, driving related asset valuations to high levels. As some funds take profits from these overvalued tech stocks, emerging markets with lower valuations and room for catch-up have become safe havens for capital. The financial sector is the core of Indonesia’s economy, with relatively stable profitability and asset quality. Since bank stocks experienced the steepest declines in the first half of the year but have the best liquidity and a high proportion of foreign ownership, when foreign investors return to reposition in Indonesia, they prioritize replenishing these key financial heavyweight stocks, including Bank Rakyat Indonesia (BBRI), Bank Mandiri (BMRI), Bank Central Asia (BBCA), and Bank Negara Indonesia (BBNI), all of which led the market with strong gains in July.
In addition to the recovery in funding and valuation aspects, Indonesia’s real economy also demonstrates solid resilience. According to the latest data from Indonesia’s Central Statistics Agency (BPS), the GDP growth rate in the second quarter reached 5.29% year-on-year, surpassing the market expectation of 5.14%. The five core pillars (manufacturing, agriculture, wholesale and retail, construction, and mining) together contributed 64% of the total GDP. Strong domestic household consumption and investment momentum prove that Indonesia’s overall economic fundamentals remain sound, further supporting the stability of the Indonesian rupiah exchange rate.
Investment Outlook and Equity Indonesia Performance
According to LSEG Lipper statistics, there are currently three Indonesian equity funds registered for sale in Taiwan. Benefiting from the stock market surge in July, these three funds achieved an average monthly return of 11.2%; however, dragged down by the sharp decline in the first half of the year, their average year-to-date performance still fell by 23.3% (average -16.4% over the past year, -36.6% over the past three years). This indicates that although the Indonesian market has experienced a strong rebound, it has not yet fully shifted from bearish to bullish. Investors still need to pay attention to whether foreign capital net buying is sustainable, whether the Indonesian rupiah exchange rate can remain stable, the profit growth momentum of major bank stocks in the second half of the year, and whether MSCI can ultimately fully lift the downgrade concerns in the future.
