Jakarta. Indonesian stocks are expected to remain volatile in the coming days as investors weigh an MSCI index rebalancing against a planned mass protest in Jakarta that could raise short-term political and market risks.

The Jakarta Composite Index (JCI) fell 1.48% to 6,405 on Wednesday. Capital market analyst Hendry Wijaya of Sucor Sekuritas said the market had already priced in much of the impact from the MSCI review, but trading volumes and volatility could rise toward the end of the month.

The planned Aug. 27 demonstration outside parliament is also being watched by investors. Hendry said its impact on the market should remain limited as long as the protest stays peaceful and does not disrupt economic activity.

“The impact would be more like very short-term noise, such as intraday risk-off sentiment and a slight weakening of the rupiah, rather than a trend reversal,” Hendry told reporters Wednesday.

However, an escalation, particularly clashes or disruptions to economic activity, could trigger rapid profit-taking and amplify market volatility, he said.

The rally is expected to draw groups from Jakarta and other parts of Indonesia, with protesters demanding the passage of an asset-forfeiture bill and tougher penalties for corruption, including the death penalty.

Market concerns over the demonstration come as the rupiah remains vulnerable, trading around Rp17,670-Rp17,712 per US dollar. The Rp17,700 level is being closely watched as a psychological threshold.

MSCI rebalancing looms
The bigger near-term catalyst for Indonesian equities is the MSCI rebalancing, which will take effect at the close of trading on Aug. 31.

“Most of the rebalancing impact has already been priced in. The August review was announced on Aug. 13 and there were no negative surprises,” Hendry said.

MSCI has maintained special treatment for Indonesia since July 7, including a freeze on foreign inclusion factors and number of shares, as well as no additions to the MSCI Global Standard Index.

As part of the latest review, GoTo Gojek Tokopedia (GOTO) and Charoen Pokphand Indonesia (CPIN) will be removed from the MSCI Global Standard Index.

Nine stocks will also be removed from the MSCI Small Cap Index: Bank Jago (ARTO), Bukalapak.com (BUKA), ESSA Industries Indonesia (ESSA), MD Pictures (FILM), Medikaloka Hermina (HEAL), MNC Land (KPIG), Raharja Energi Cepu (RATU), Semen Indonesia (SMGR) and Transcoal Pacific (TCPI).

Hendry expects trading volume and volatility to increase toward the effective date, particularly from Aug. 29 to Aug. 31.

Stocks removed from the indexes could face selling pressure from passive funds, while those receiving higher index weights could attract relatively stronger inflows.

“The remaining impact is the technical execution by passive funds on the effective date, with the closing on Aug. 31. Volume and volatility could peak toward the Aug. 29-31 close,” he said.

Once the rebalancing takes effect and is reflected in trading on Sept. 1, the technical pressure from portfolio adjustments is expected to ease. Market direction should then be driven more by domestic economic fundamentals and global conditions.

JCI remains bullish
Despite the near-term pressure, Hendry remains positive on the JCI’s medium-term outlook.

He considers the current decline a healthy correction as long as the index holds key support levels. In the short term, the JCI could test support between 6,377 and 6,255.

If selling pressure eases and the index rebounds, the 6,623-6,730 range could become the next resistance and upside target.

The market will therefore face competing forces through early September, with technical selling related to the MSCI changes weighing against the prospect of a recovery once passive-fund adjustments are completed.

Other market drivers
Investors are also watching the selection process for the next Bank Indonesia governor. Destry Damayanti, the sole candidate nominated to lead the central bank, is undergoing a parliamentary fit-and-proper test on Aug. 26-27.

Hendry said greater certainty over the central bank’s leadership could support the rupiah and investor confidence.

Global markets will also be driven by US Personal Consumption Expenditures inflation data and signals from the Federal Reserve following the Jackson Hole economic symposium. The data will influence expectations for US interest rates and potentially affect foreign capital flows into emerging markets such as Indonesia.

A rebound in Wall Street stocks, particularly technology shares, lower oil prices and stronger bond markets are providing relatively positive external signals for Indonesian equities.

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