India becomes least-favoured Asian stock market in BofA survey – why fund managers are underweight

Indian Equities Fall Out of Favor: Fund Managers Underweight on Asia’s Fourth-Largest Market

Mumbai, India – India’s stock market, already among the weakest performers this year, has now become the "least-favored" in Asia, according to a recent Bank of America Corp. (BofA) survey of fund managers. This shift in sentiment, which sees India replacing Indonesia at the bottom of investor preferences, signals growing caution towards Indian equities despite a brighter earnings outlook.

The comprehensive survey, conducted between August 7th and August 13th, gathered insights from 98 fund managers collectively overseeing a substantial $272 billion in assets. The findings paint a concerning picture for India, with a significant 32% of respondents indicating they were net underweight on the nation’s stock market.

This downturn in investor confidence comes as Indian equities have experienced a two-week decline, even as corporate earnings reports suggest improving fundamentals. This divergence highlights a prevailing investor wariness that transcends positive financial indicators.

Key Concerns Driving Underweight Stance:

A Bloomberg report detailing the survey’s findings pinpointed several critical factors contributing to this negative outlook:

• Absence of Clear AI Exposure: The most significant concern for Indian equities was identified as the lack of readily apparent exposure to the burgeoning field of artificial intelligence. In a global landscape increasingly driven by technological innovation, India’s perceived lag in this sector is a major deterrent for fund managers.
• Weak Economic Growth: Persistent concerns about the pace of India’s economic growth continue to weigh on investor sentiment.
• Lack of Reforms: The absence of substantial and impactful economic reforms was also cited as a reason for the negative view. Investors are seeking concrete policy changes that can stimulate growth and improve the business environment.
• Elevated Valuations: Despite recent declines, the valuations of Indian stocks are still considered high by many fund managers, leading to a cautious approach.

Contrasting Trends: Inflows Amidst Caution

Interestingly, the survey results coincide with a period of significant foreign investment into Indian equities. Global investors have purchased over $4 billion worth of Indian stocks during the current quarter, marking the highest inflow among emerging markets in the region, according to Bloomberg-compiled data. This follows record outflows witnessed in the first half of the year. This juxtaposition suggests a complex market dynamic, where long-term investors may be identifying opportunities even as broader fund manager sentiment remains cautious.

Moreover, the earnings reported by companies within the benchmark NSE Nifty 50 demonstrated an impressive 18% year-on-year increase in the latest three-month period, significantly surpassing the 10% growth projected by Motilal Oswal Financial Services Ltd. While these strong earnings offer a glimmer of hope, they have not yet been enough to sway the overall cautious mood among fund managers.

Historical Precedent and Lingering Concerns:

This isn’t the first time India has found itself at the bottom of the BofA survey. In May, India was similarly ranked as the least-preferred market, primarily due to rising energy costs stemming from the US-Iran conflict and the subsequent surge in global crude prices. With no clear resolution in sight for the conflict, energy costs are once again on the rise, exacerbating existing investor concerns.

Despite a recovery of 8% from its recent March low, the Nifty 50 remains Asia’s second-worst performing major market this year, with an overall decline of 8%. The index is also facing the potential end of a remarkable 10-year streak of annual gains, adding to the somber outlook.

Indonesia’s Resurgence:

In stark contrast to India’s predicament, investor sentiment towards Indonesia has shown considerable improvement. The share of fund managers who were net underweight on the country decreased to 27% from 32% in July. The benchmark Jakarta Composite Index has surged over 20% from its June low, bolstered by the central bank’s measures to stabilize the currency and alleviate concerns about a potential downgrade to frontier-market status by MSCI Inc.

Meanwhile, Taiwan and Japan continue to maintain their positions as investors’ preferred markets in the region, highlighting a flight to perceived stability and growth opportunities within other Asian economies.

The BofA survey underscores a pivotal moment for Indian equities. While strong corporate earnings and recent foreign inflows offer some positive signals, the pervasive concerns surrounding AI exposure, economic growth, reform implementation, and elevated valuations present significant hurdles that need to be addressed to regain the confidence of a broader spectrum of global fund managers. The coming months will be crucial in determining if India can shed its "least-favored" status and reclaim its position as an attractive investment destination in the Asian market.