India has overtaken Indonesia as the least-preferred stock market in Asia, signalling increased caution among global fund managers despite signs of improvement in corporate earnings, Bloomberg reported.
A Bank of America (BofA) survey of 98 fund managers overseeing $272 billion in assets showed that 32% of respondents were net underweight on Indian equities. India emerged as the least-favoured market in the survey, while investor sentiment towards Indonesia improved.
The shift highlights a growing disconnect in India’s equity market. Although corporate earnings have strengthened and foreign investors have started returning to Indian stocks, concerns remain over valuations, economic growth and the country’s relatively limited exposure to the global artificial intelligence boom.
WHY FUND MANAGERS ARE BECOMING CAUTIOUS ON INDIA
The survey identified India’s limited exposure to AI as the biggest concern surrounding its equities. With AI-driven investment becoming a major theme across global markets, fund managers appear increasingly interested in companies and markets that can benefit more directly from the sector’s expansion.
Concerns over weak economic growth ranked as the second-biggest issue for Indian equities. High valuations and what investors perceive as insufficient reforms were also cited as factors contributing to the negative outlook.
The cautious sentiment comes despite stronger corporate earnings. Profits of Nifty 50 companies increased 18% year-on-year in the latest three-month period, significantly exceeding Motilal Oswal Financial Services’ estimate of 10% growth.
Foreign investors have also resumed buying Indian stocks. They have purchased more than $4 billion worth of Indian equities during the current quarter, the highest inflow among emerging markets in the region, following record outflows during the first half of the year.
The survey therefore does not necessarily indicate that investors believe Indian companies are underperforming. Instead, it suggests that fund managers are questioning whether the pace of earnings growth is enough to justify the comparatively high valuations of Indian equities.
INDIA’S MARKET PERFORMANCE ADDS TO CONCERNS
The broader performance of Indian stocks has also contributed to investor caution.
The Nifty 50 has rebounded 8% from its recent March low but remains down 8% so far this year. This makes it the second-worst-performing major stock market in Asia in 2026.
The index is also heading towards ending a remarkable 10-year streak of annual gains.
Energy prices have added further uncertainty. India was last identified as the least-preferred market in the BofA survey in May, when the US-Iran conflict sent crude oil prices higher and raised concerns about the effect of elevated energy costs on India’s economic growth.
With the conflict still lacking a clear resolution, higher energy prices are once again weighing on investor sentiment towards Indian equities.
WHY INDONESIA HAS MOVED AHEAD OF INDIA
While sentiment towards India weakened, investors became somewhat more optimistic about Indonesia.
The share of fund managers who were net underweight on Indonesian equities declined to 27% from 32% in July.
Indonesia’s benchmark Jakarta Composite Index has climbed more than 20% from its June low. The gains have been supported by steps taken by the country’s central bank to stabilise the currency and reduced concerns that MSCI could downgrade Indonesia to frontier-market status.
Taiwan and Japan remain the most preferred markets among the fund managers surveyed.
For India, the latest BofA survey appears to represent more of a warning about investor sentiment than a negative assessment of corporate fundamentals. Earnings are recovering and foreign capital is returning, but investors are increasingly questioning whether India’s growth prospects, valuations, reform momentum and exposure to major global themes are strong enough to justify the premium commanded by its equities.
