India has replaced Indonesia as the least-preferred stock market in Asia, reflecting growing caution among global fund managers even as corporate earnings show signs of improvement, reported Bloomberg.
A Bank of America (BofA) survey of 98 fund managers, managing assets worth $272 billion, found that 32% of respondents were net underweight on Indian equities. India was the least-preferred market in the survey, while sentiment towards Indonesia improved.
The shift highlights a growing disconnect in the Indian market. While earnings have strengthened and foreign funds have returned to local stocks, investors remain concerned about valuations, economic growth and India’s limited exposure to the global artificial intelligence boom.
WHY FUND MANAGERS ARE TURNING CAUTIOUS ON INDIA
The biggest concern identified in the survey was the lack of clear AI exposure in Indian equities. With AI-related investments driving significant interest across global markets, fund managers appear to be looking for companies and markets that can benefit more directly from the theme.
Weak growth emerged as the second-biggest concern for Indian equities. High valuations and a perceived lack of reforms were also cited as reasons behind the bearish view.
This caution comes despite improving corporate earnings. Earnings of companies in the Nifty 50 rose 18% year-on-year in the latest three-month period, ahead of Motilal Oswal Financial Services’ estimate of 10% growth.
Global funds have also returned to Indian equities. They have bought more than $4 billion worth of local stocks in the current quarter, the highest among regional emerging markets, after record outflows during the first half of the year.
The survey therefore does not necessarily suggest that fund managers believe Indian companies are performing poorly. Instead, it points to concerns about whether the earnings growth is sufficient to justify the relatively high valuations of Indian stocks.
INDIA’S MARKET PERFORMANCE IS ADDING TO THE PRESSURE
Investor caution is also reflected in the broader market’s performance.
The Nifty 50 has recovered 8% from its recent low in March, but remains down 8% for the year, making it the second-worst performing major market in Asia this year.
The index is also on track to break a historic run of 10 consecutive years of annual gains.
Energy prices are adding another layer of uncertainty. India was last ranked as the least-preferred market in the BofA survey in May, when the US-Iran conflict pushed crude oil prices higher and raised concerns about the impact on growth.
With no clear resolution to the conflict, rising energy prices are again weighing on investor sentiment towards India.
WHY INDONESIA HAS MOVED AHEAD OF INDIA
While sentiment towards India deteriorated, investors became less negative on Indonesia.
The proportion of fund managers who were net underweight on Indonesian equities fell to 27% from 32% in July.
Indonesia’s benchmark Jakarta Composite Index has gained more than 20% from its June low, helped by measures from the country’s central bank to stabilise the currency and fading concerns about a potential downgrade to frontier-market status by MSCI.
Taiwan and Japan continue to be the most preferred markets among investors surveyed.
For India, the latest BofA survey is therefore more of a warning on investor sentiment than a verdict on corporate fundamentals. Earnings are improving and foreign money has started flowing back, but investors are increasingly questioning whether India’s growth outlook, valuations, reforms and exposure to major global themes are strong enough to justify the premium attached to its equities.
That tension between improving fundamentals and expensive valuations could remain an important factor for Indian stocks in the months ahead.
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