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Markets at a Crossroads: Earnings Recovery vs Fiscal Risks

Indonesia's stock market is still facing quite complex dynamics at the start of 2026. On one hand, foreign fund flows continue to show pressure. However, on the other hand, the prospects for corporate earnings growth are starting to show signs of recovery.

The combination of these two factors places the market at an inflection point, where the direction of the next move will be largely determined by corporate fundamentals dynamics and fiscal policy stability.

Foreign Outflows Still Dominate the Market
Foreign investors have recorded two consecutive years of net outflows from Indonesia's stock market.
- FY2025: -Rp43 trillion
- FY2024: -Rp29 trillion

This trend continues into early 2026, with net outflows of -Rp17.3 trillion year-to-date.

The banking sector is the primary source of foreign fund outflows, particularly the stock BBCA, which has recorded outflows of around Rp15.9 trillion YTD.

Interestingly, this pressure is not entirely driven by changes in corporate fundamentals, but rather more by non-fundamental sentiment and exacerbated by several recent corporate events.

Earnings Recovery Could Become a Turning Point
While foreign fund flows remain negative, there is a factor with the potential to become a catalyst for a change in market direction: improvements in corporate earnings growth (EPS).

Companies within the research coverage are expected to record:
+10% EPS growth in FY2026
Following -3% EPS growth in FY2025

For a broader index such as IDX80, earnings growth is even estimated to reach around +15% in FY2026

The majority of this earnings recovery is expected to come from the sectors:
- Metals
- Oil & Gas

These two sectors are supported by global commodity price dynamics as well as the potential for increased energy and mineral demand.

Fiscal Risk Becomes the Key Market Concern
Although earnings prospects are improving, fiscal risk has become the main concern for the market in 2026.

There are two key factors to pay attention to.
1. Revenue Shortfall
Government revenues in FY2025 came in 8% below target, mainly due to tax receipts falling short of expectations.

2. Rising Government Spending
Meanwhile, the government is targeting spending increases of around +11% year-on-year in FY2026.

Most of this spending increase comes from programmes:
- Free Nutritious Meals (MBG)
- Defence spending

If the imbalance between revenues and spending continues to widen, the government may need to increase bond issuance to cover the deficit.

Possible consequences include:
- A wider fiscal deficit
- Risk of credit rating downgrades by agencies such as Fitch, Moody's or S&P
- Higher government borrowing costs

These dynamics could impact both the bond market and investor sentiment towards Indonesian assets.

Sector Strategy: Why Commodities Stand Out
Considering the fiscal situation and global geopolitical uncertainties, the commodities sector is seen as having a relatively more defensive position whilst offering upside potential.

This sector has the potential to benefit from commodity price trends and global demand for strategic minerals.

In addition, we also see opportunities in banking with strong earnings recovery potential. Banks such as the big 4 are expected to post improved performance as domestic economic activity recovers.

Indonesia's stock market is currently at quite an interesting juncture.

Foreign fund flows are indeed still negative, but prospects for corporate earnings recovery could become an important catalyst for a change in market sentiment.

At the same time, investors should also monitor fiscal risks that could affect macro stability and risk perception towards Indonesian assets.

In such an environment, a selective and fundamentals-based investment approach becomes increasingly important.