Grantham Mayo Van Otterloo & Co (GMO) is reallocating funds from Indonesian stocks to Thai equities following a warning from MSCI Inc in late January that Indonesia could be downgraded to frontier market status.

The Boston-based investment firm quickly reduced its substantial holdings in Indonesian stocks after the index provider's alert, according to Warren Chiang, a portfolio manager and quantitative specialist at GMO. The company is significantly increasing its exposure to Thai stocks, anticipating political stability following the election victory of Prime Minister Anutin Charnvirakul.

Chiang stated that Thailand has become one of GMO's largest overweight positions due to stronger macroeconomic indicators. "The election outcome was an additional positive factor," he said in an interview, adding that global capital outflows from Indonesia are likely to continue. Chiang leads a team of quantitative analysts providing investment guidance for funds exceeding $3 billion.

Thai stock markets have outperformed other Asia-Pacific markets this month with a 10% gain, benefiting from improved economic growth and Anutin's election victory. Data shows foreign investors have purchased a net $1.6 billion of Thai stocks this year, the highest level since 2022.

Chiang, based in Berkeley, California, said GMO has reduced its overweight position in Indonesian stocks to neutral following MSCI's announcement last month. The index provider stated it would suspend certain index adjustments for Indonesian markets until regulators address concerns about highly concentrated ownership in listed companies, triggering significant selling in local markets.

In recent years, concerns about free-float shares have become a contentious issue for Indonesia's $878 billion stock market. Investors have complained about low trading volumes in major Indonesian companies and dominance by a small number of wealthy families.

Indonesia faces a May deadline to demonstrate to the index provider that reforms, including doubling the minimum free-float requirement to 15%, will improve ownership transparency.

"The ideal scenario would be for Indonesia to implement sufficient reforms to secure an extension from MSCI," Chiang commented. "For any emerging market, implementing such rapid changes would be very challenging."