When it comes to sentiment among Asian fund managers, Indonesia and India are distinctly out of favour. The findings of a survey by Bank of America on October 13 revealed that Asia’s fifth- and third-largest economies were the least preferred equity markets in the region.

Since the beginning of this year, the Jakarta Composite Index has fallen 39 per cent, making it the world’s worst-performing stock market. India’s Nifty 50 Index, meanwhile, is down 12.7 per cent, putting it on track to record its first yearly decline following 10 straight years of gains.

What is particularly troubling is that the problems faced by Indonesia and India are ones typically associated with old-fashioned emerging market crises. These vulnerabilities include declines in local currencies to record lows versus the US dollar, large outflows of foreign capital, pressure to raise interest rates more aggressively and a treacherous external environment.

However, while the sell-offs in both countries share certain similarities, they are distinct from each other. Indonesia’s financial woes are home-grown and structural, stemming from the nation’s failure to fully embrace the reforms required to establish policy credibility and predictability. India’s problems, by contrast, are externally driven and accentuate policymakers’ success in making the economy more resilient and investible.

The challenges confronting Indonesia are particularly pressing. On October 15, index provider MSCI said it had launched a consultation with market participants on a proposal to reclassify Indonesian stocks from “emerging market” to “stand-alone” status. This would lump Southeast Asia’s largest economy together with war-torn Ukraine and Lebanon.

While MSCI had previously considered downgrading Indonesian equities to frontier market – a riskier category than emerging market – it said a one-notch downgrade “would not properly recognise the depth of the market problems”. MSCI pointed to “persistent opacity in shareholding structures and suspected coordinated trading behaviour”, exacerbated by a “lack of evidence of meaningful enforcement”.

On October 16, Indonesian shares suffered their sharpest daily decline since the 1997-98 Asian financial crisis. If the country is ejected from MSCI’s major equity indices, it would be the first emerging market relegated to stand-alone status for “market integrity failures” as opposed to sanctions and capital controls that triggered previous index removals.

Indonesia’s lack of liquidity and transparency is symptomatic of bigger problems that have been festering for decades. Weak governance, state interventionism, democratic backsliding and the politicisation of economic policy have undermined investor confidence. Many listed firms are tightly held by founders or families, reducing the volume of shares available for public trading.

Although resource-rich Indonesia has made great strides since the late 1990s, growing briskly and exploiting the energy transition, its capital markets remain underdeveloped and heavily reliant on foreign money. MSCI’s threat to remove the country from its indices, while forcing regulators to accelerate reforms, also heightens concerns about the rupiah, interest rates, growth and public finances. The risk is that bond markets punish Indonesia more severely.

India faces a different predicament. At first glance, it appears to be suffering a full-blown currency crisis. The rupee has fallen against the US dollar for nine straight years to a record low. This has raised the cost of imports, reduced the value of overseas investors’ investments when converted back into dollars and made it harder to finance the current account deficit.

Yet India is out of favour with foreign investors for reasons that have little to do with the management of the economy. The combination of US President Donald Trump’s tariff war and the global energy shock has added to long-standing concerns about India’s lofty stock market valuations.

Moreover, India’s investment appeal has waned relative to Asia’s technology-driven markets. In the Bank of America survey, the lack of an “AI play” was the biggest concern for equity investors in India.

In a report in August, Maneesh Dangi of Mosaic Asset Management said the global “growth scarcity premise” had changed dramatically in the past two years. “I’m watching the US, and now [South] Korea and other East Asian markets, deliver earnings growth that dwarfs anything India can offer, at multiples that are, frankly, cheap.”However, while the AI boom has drawn foreign capital away from India, the deterioration in sentiment has shown the country can withstand a sustained sell-off. Despite the persistent decline in the rupee and the energy crisis, inflation and the current account deficit remain relatively contained while the central bank has not had to raise interest rates aggressively.

Furthermore, domestic institutional investors have provided crucial support to the stock market amid another banner year for Indian initial public offerings. Dangi said Prime Minister Narendra Modi’s greatest achievement was to entrench economic stability: “Modi’s real legacy is a macro stability premium, not a growth premium.”Emerging Asia is a diverse region. The sell-offs in Indonesia and India reveal some of the most important weaknesses and strengths of Asia’s developing economies.