MSCI opens consultation on dropping Indonesia; Jakarta shares fall 16%

MSCI has opened a consultation on dropping Indonesia from its emerging markets index, and Jakarta’s main stock gauge fell 16% over the two sessions that followed.

Indonesia accounted for less than 0.5% of the iShares MSCI Emerging Markets ETF (EEM) as of Oct. 16, according to our tracking. If MSCI removes Indonesia, funds tied to the benchmark would be expected to sell their Indonesian holdings at the implementation date. EEM, which tracks the index, would be one seller, but its forced selling alone is small. A 16% move in the Jakarta gauge therefore implies a repricing well beyond what a sub-0.5% starting weight mechanically requires from EEM.

The consultation is not a final index decision, and the selloff may reflect investors assigning probability to exclusion rather than a certain mechanical event. MSCI’s final decision and implementation timetable will determine how much actual selling ultimately occurs.