Indonesia's beaten-down stock market is drawing renewed interest from global investors as the rally in AI-linked stocks begins to lose momentum, prompting portfolio managers to rotate into undervalued markets, according to Reuters.
The shift comes after months of heavy selling in Indonesian equities, which have been among Asia's worst-performing major markets this year. The Jakarta benchmark index is still down about 28% in 2026, weighed by concerns over fiscal discipline and uncertainty surrounding an ongoing review by index provider MSCI. However, the benchmark rebounded more than 10% in July, outperforming several technology-heavy Asian markets that recently came under pressure, as per a Reuters report.
Investors have started taking profits in markets such as South Korea and Taiwan, where AI-driven gains had pushed valuations sharply higher, while reallocating funds to markets that offer more attractive valuations and stronger long-term macroeconomic growth prospects.
Market participants believe Indonesia's economy remains an underappreciated growth story despite recent setbacks. Some global investors have begun selectively increasing exposure to Indonesian equities as valuations become more compelling.
The change in sentiment follows more than $4 billion in foreign outflows from Indonesian stocks this year, driven by concerns over market transparency, fiscal policy and the MSCI review. Even so, analysts believe much of the negative news has already been reflected in stock prices, according to Reuters.
Some asset managers are cautiously rebuilding positions, particularly if company valuations become cheaper and the Indonesian rupiah stabilises. Allan Gray made its first investment in Indonesia last month by purchasing shares of Indofood Sukses Makmur, citing attractive earnings multiples and the company's dominant position in the consumer sector.
Banking and commodity companies have also returned to investors' radar. Citi currently favours stocks including Bank Central Asia, Vale Indonesia, Alamtri Minerals and Amman Mineral International.
The next major catalyst for Indonesian markets will be MSCI's decision expected in November. Most analysts anticipate Indonesia will retain its emerging-market status after regulators introduced reforms earlier this year aimed at addressing the index provider's concerns.
Investor confidence also received a boost after S&P Global Ratings reaffirmed Indonesia's sovereign credit rating with a stable outlook last week.
According to Reuters, Citi noted that Indonesia featured prominently in recent client meetings across Hong Kong and Thailand, with several investors expressing the view that the country's equity market may have already bottomed.
However, analysts remain divided over whether the recent recovery can be sustained. Investors are also rediscovering opportunities in other emerging markets, including India and China, limiting the uniqueness of Indonesia's appeal.
Indonesia continues to face macroeconomic challenges, including concerns over President Prabowo Subianto's welfare spending plans and their potential impact on public finances. The rupiah has weakened nearly 8% this year to record lows, while higher oil prices following supply disruptions linked to tensions involving Iran have added pressure on the import-dependent economy.
Some strategists argue that Indonesia has suffered a structural downgrade in investor perception, making it difficult to attract significant new foreign capital despite improving valuations, according to Reuters.
Nevertheless, foreign investors have reduced exposure gradually rather than exiting the market entirely. Reuters cited Copley Fund Research data showing that more than half of the active fund managers it tracks remain overweight on Indonesia, although the proportion of funds invested in the country has fallen to a 15-year low of 80.45%.
According to Reuters, Copley Fund Research believes Indonesia's long-term investment case remains intact and that, with positioning no longer crowded, investors may ultimately face a greater risk by missing a recovery than by remaining patient.
