Continued Decline: What Should the IHSG's Fair Level Be Now?

Jakarta, CNBC Indonesia - The Jakarta Composite Index (IHSG) is currently facing a phase of persistent liquidity pressure in the domestic financial market, reflected by its closing level of 6,599.24 on Monday, 18 May 2026. The IHSG has fallen for five consecutive days and is down 23.7% so far this year. This gradual weakening stems from a combination of external sentiment volatility and a shift in domestic macroeconomic dynamics. The main drivers of the index’s contraction are the depreciation of the Rupiah and continued cycle of foreign outflows from the equity market. In the face of high uncertainty, market participants require an objective quantitative basis. The valuation approach using a base case scenario becomes crucial to map the purely mathematical equilibrium value of the index, while also setting aside short-term speculative panic.

Discount on Valuation due to Macro-Economic Divergence

The Rupiah’s weakness that breached the Rp17,640 per US$ level is one of the main risk sources discounting the valuation of domestic equity assets. That exchange level requires adjustment of corporate profit margin projections, particularly for issuers reliant on imported raw materials or foreign currency debt. This macroeconomic condition becomes more challenging due to divergent expected yields. On one hand, Bank Indonesia holds rates at 4.75% to maintain monetary stability. On the other hand, the bond market is responding to currency risk by pushing the 10-year Indonesian Government Bond yield up significantly, reaching 6.851%. The widening spread technically devalues the attractiveness of the equity market, forcing investors to demand a much higher risk premium.

Valuation Target Calculation via Historical Forward P/E Band

To formulate an objective valuation multiple target, this analysis uses a historical valuation regression based on the Forward P/E ratio over the last ten years from the Forward P/E Band graph. The average fair market valuation for Indonesian equities trades around a Forward P/E of 14.5x, while the lower bound under liquidity contraction or over-supply conditions (-1 Stddev) sits at 12.5x. In the base-case model, it is assumed that market panic begins to ease and the exchange rate seeks a new equilibrium. However, investors are not expected to assign the index a full-average Forward P/E because the funding costs remain tight. Therefore, a conservative target valuation is placed at minus 0.5 standard deviations (-0.5 SD).

Mathematical Target Forward P/E:

Forward P/E Average over 10 Years (Mean) = 14.5x

Forward P/E Lower Bound (-1 SD) = 12.5x

Difference of 1 Standard Deviation = 14.5x - 12.5x = 2.0x

Target Forward P/E = 14.5x - (0.5 x 2.0x) = 13.5x

Model Validation via Cost of Equity Components

The target Forward P/E multiple of 13.5x is tested for feasibility using the return rate required by the stock market, or the Cost of Equity. This validation step sums the yield on current government bonds (risk-free rate) with an average equity risk premium (ERP) of 4.50%. The mathematical calculation yields:

10-Year Government Bond Yield (Risk-Free Rate) = 6.851%

Equity Risk Premium (ERP) = 6.69%

Cost of Equity = 6.851% + 6.69% = 13.541%

Implied Basic P/E = 1 / 11.351% = 7.39x

Given that the base-case valuation multiple target of 13.5x is well above its theoretical lower bound (7.39x), the Forward P/E ratio model of 13.5x is confirmed as financially robust to accommodate the growth premium in issuers’ net profits going forward.

IHSG Fair Value Projection and Upside Potential

The final step of this quantitative calculation is to integrate the target Forward P/E ratio with projections of issuer profitability within the index. Based on consensus data from heavyweight constituents, aggregate 12-month Forward Earnings Per Share (Forward EPS) for the IHSG is projected to remain steady at 510.

Mathematical Calculation of Fair Value and Upside Potential:

Forward EPS IHSG = 510

Target Forward P/E Base Case = 13.5x

Fair Value IHSG = 510 x 13.5 = 6,885.00

Current IHSG Close = 6,599.24

Fundamental Point Gap = 6,885.00 - 6,599.24 = 285.76 points

Upside Potential = (285.76 / 6,599.24) x 100% = 4.33%

From these calculations, the fair value of the IHSG under the base-case scenario is estimated at 6,885. If this fundamental figure is directly compared with the current closing level at 6,599.24, the Indonesian stock market is mathematically confirmed to be trading in a discounted area with an expected upside of 4.33%.

This quantitative data provides strong indications that the recent correction in major index movers has been driven more by adjustments in cash flows due to currency volatility around 17,640 rather than structural damage to the internal fundamentals of corporations.

The target level of 6,885 should be the most rational anchor for a reversal when external currency volatility eases and bond yields normalise to normal ranges.

Disclaimer: This article is an output of CNBC Indonesia Research. This analysis is not intended to invite readers to buy, hold, or sell any investment products or sectors. The decision is entirely up to readers, and we accept no responsibility for any losses or gains arising from such decisions; this is rough arithmetic that may contain errors.