Indian stocks least preferred for Asia fund managers: BofA survey

A recent survey by BofA Securities reveals that India is the least favored market for Asia-Pacific fund managers, with 32% of fund managers (FMs) holding an underweight position. This is compared to 27% for Indonesia, 23% for the Philippines, and 18% for China. The survey, which polled 203 fund managers managing $581 billion in assets, indicates a shift in investment strategies.

Managers are pulling back from aggressive technology investments and focusing on defensive sectors. Key concerns for Indian equities include the lack of clear AI exposure (32%), weak growth (18%), and a lack of reforms (18%). The depreciating rupee is no longer a concern, but high valuations are causing worry, with 9% of FMs flagging it as an issue, up from 4% in July.

A significant 59% of investors are hedging AI downside risk by shifting into value, cyclical, and defensive sectors, a trend that doubled from July. Nearly two-thirds of respondents require more evidence of AI monetisation before increasing exposure to AI-related stocks. Taiwan is the most preferred market, with 55% of respondents being overweight, followed by Japan at 50% and South Korea at 23%.

Despite a defensive tilt, technology semiconductors and hardware remain the top two sector preferences. The rotation away from cyclicals and technology was most pronounced in Asia ex-Japan, where investors moved into utilities, banks, consumer staples, healthcare, and telecoms. Industrials and tech hardware saw the steepest month-on-month declines.

In Japan, investment was heavily concentrated in banks and semiconductors, with banks reaching an all-time high in survey readings. Earnings remain a primary driver for Japanese equity views, although Bank of Japan policy normalization emerged as a concern for 23% of respondents. Globally, 60% of investors anticipate the Bank of Japan to raise rates as early as September 2026, with USD/JPY at 165 seen as a potential trigger for Japanese currency intervention.

Investor optimism toward Asia ex-Japan equities reached the 89th percentile historically in August, positioning the region as undervalued. Corporate profit expectations remain well above long-run averages, with concern that consensus earnings estimates were too high falling to the 9th percentile historically. Expected returns for Japanese equities moderated slightly to 4.9% from 5.5% in July.

Sentiment around the semiconductor cycle weakened sharply in August, with Taiwan identified as the top market benefiting from the next AI phase (27%), followed by Japan and China at 18% each. Within the AI value chain, Power and Energy were the most favored segment for risk-reward over the next 12 months. China's economic outlook improved in August but still trailed Japan significantly.

Inflation expectations in Asia Pacific ex-Japan eased further, with 23% of investors anticipating higher inflation over the next 12 months.