India Overtakes Indonesia as Asia’s Least-Favored Stock Market—Why?

India has taken a position that Indonesia previously held: the least-favored Asian equity market among fund managers surveyed by Bank of America.

The August survey found that a net 32% of respondents were underweight Indian equities, putting India at the bottom of the regional preference ranking.

Indonesia, meanwhile, improved to a net 27% underweight from 32% in July. Taiwan and Japan remained the most preferred markets.

The survey covered 98 respondents managing a combined $272 billion, with responses collected from August 7 to August 13, 2026.

The result is particularly striking because India’s corporate earnings are improving and foreign investors have recently started buying Indian shares again.

AI Exposure Has Become India’s Biggest Problem

The most important concern cited by fund managers was not conventional corporate profitability.

It was the Indian equity market’s lack of clear exposure to the artificial-intelligence investment boom.

Global capital has increasingly concentrated around semiconductors, servers, high-bandwidth memory, data centers and other infrastructure required to build AI systems.

That creates a structural advantage for markets such as Taiwan.

Taiwan’s exchange contains major companies tied directly to the semiconductor and hardware supply chain. One report on the BofA survey showed around 55% of managers overweight Taiwan, with semiconductors and hardware among their preferred sectors.

India has a major technology-services industry, but comparatively little listed exposure to the hardware side of the AI trade.

In a market where AI has become one of the biggest allocation themes in the world, that distinction matters.

Growth Concerns Come Next

Fund managers ranked weaker economic growth as another major risk.

India is particularly sensitive to energy shocks because of its large reliance on imported oil.

Middle East tensions have repeatedly driven crude prices higher during 2026, creating pressure on the rupee, inflation and India’s external accounts.

On August 18, Brent crude was hovering around $91 a barrel as renewed US-Iran tensions pushed oil higher. Indian equities declined again, extending a losing streak in the Nifty 50.

Higher energy costs can ultimately squeeze both corporate margins and household spending.

Valuations Are Still a Concern

High valuations were another reason investors remained cautious.

Although Indian stocks have fallen substantially this year, some global managers still see them as expensive relative to earnings prospects and competing Asian markets.

Fund managers also cited insufficient reforms as a reason for their bearish relative positioning.

That creates a difficult combination:

prices have fallen, but some investors still do not consider them cheap enough to offset the risks.

Indian Stocks Have Lagged Asia

Market performance helps explain the survey results.

Reuters reported that the Nifty 50 was down about 7.9% year-to-date as of August 19, while the Sensex had lost around 9.8%.

Those returns contrast with much stronger performances in markets including Taiwan and South Korea.

Bloomberg also described the Nifty as the second-worst-performing major Asian market in 2026 despite recovering about 8% from a March low.

If the weakness persists, the Nifty could end a remarkable run of ten consecutive calendar years of gains.

Yet Corporate Earnings Are Getting Better

The bearish investor positioning has emerged at the same time as a significant earnings recovery.

Reuters reported that profits among Nifty 50 companies grew an average 18% year on year in the June quarter, the strongest increase in ten quarters.

That was substantially better than Motilal Oswal Financial Services’ roughly 10% growth estimate.

Nineteen sectors exceeded expectations, while the earnings upgrade-to-downgrade ratio improved to 1.5.

Banks, metals, retail, jewellery and consumer businesses were among the areas showing strong performance.

So India’s current market problem is not simply weak corporate profits.

It is the gap between improving fundamentals and what global investors currently want from Asian equity exposure.

Foreign Investors Have Also Started Buying Again

Another apparent contradiction is foreign flows.

Bloomberg data cited alongside the BofA survey showed global funds purchased more than $4 billion of Indian stocks during the current quarter, the largest amount among regional emerging markets.

Those purchases follow a difficult first half of 2026.

By mid-August, foreign investors had sold roughly $25 billion of Indian equities year-to-date, according to Reuters.

This illustrates why “underweight” should not be confused with “no investment.”

A fund manager can continue buying Indian stocks while still holding a smaller allocation than the benchmark or than they hold in other Asian markets.

Energy Is India’s Structural Vulnerability

Oil remains one of the most important variables.

During the earlier phase of the Iran conflict, foreign investors aggressively reduced exposure to Indian assets as energy costs surged.

The rupee weakened sharply, government bond yields climbed and India’s import bill came under pressure.

India is one of the world’s largest oil importers.

A prolonged rise in crude prices can therefore increase inflation, weaken the current account, pressure the currency and reduce disposable income.

That helps explain why geopolitical developments in the Middle East have had an outsized influence on Indian market sentiment in 2026.

Indonesia Is Moving in the Opposite Direction

Indonesia’s ranking improved in the latest BofA survey.

A net 27% of fund managers were underweight Indonesian equities, compared with 32% in July.

That is still a negative allocation.

It does not mean global managers have suddenly become outright bullish on Indonesia.

But the direction has improved.

The JCI Has Rebounded More Than 20%

Bloomberg linked the change in sentiment to a recovery in Indonesian equities.

The Jakarta Composite Index has rallied more than 20% from its June low, supported by Bank Indonesia measures to stabilize the rupiah and reduced anxiety surrounding Indonesia’s potential MSCI reclassification.

That recovery follows an exceptionally difficult first half.

PEFINDO reported that by the end of June, the JCI was down 34.74% year-to-date, hurt by global uncertainty, rupiah weakness, foreign outflows and concerns about MSCI’s review.

The rebound has therefore been substantial even though Indonesia’s market has not fully recovered from the earlier decline.

Indonesia’s MSCI Risk Has Not Disappeared

There is an important qualification.

MSCI has not permanently cleared Indonesia of downgrade risk.

In June, MSCI extended its review until November 2026 and said a downgrade from emerging-market to frontier-market status remained possible if transparency reforms proved insufficient.

Its concerns include opaque ownership structures, free-float visibility and suspected coordinated trading.

The more precise interpretation is that market fears have eased, not disappeared.

That distinction matters because an eventual frontier-market downgrade could still force selling by passive funds tracking MSCI emerging-market benchmarks.

Taiwan and Japan Remain the Favorites

Taiwan and Japan occupied the other end of the BofA ranking.

Taiwan’s appeal is closely linked to semiconductors and AI hardware.

Japan offers a different investment story, including corporate-governance reforms, shareholder returns, industrial strength and exposure to global technology.

The survey therefore illustrates a broader change in Asian equity allocation.

Investors are not treating Asia as one trade.

They are increasingly differentiating among countries according to AI exposure, valuations, domestic policy, currency risk and earnings momentum.

Does the Survey Mean India Is a Bad Investment?

Not necessarily.

The BofA survey captures relative positioning and sentiment at a particular point in time.

India still has several supportive factors.

Nifty earnings are growing, foreign funds have started returning, and India’s foreign-exchange reserves climbed to a six-month high of $716.9 billion as of August 14, close to the record level reached earlier this year.

Domestic consumption and credit growth also remain important sources of corporate earnings.

The challenge is that global investors currently see stronger relative opportunities elsewhere in Asia.

Bottom Line

India has replaced Indonesia as Asia’s least-favored stock market in Bank of America’s August 2026 fund-manager survey.

A net 32% of respondents were underweight India, citing weak direct exposure to the AI investment boom, softer growth, high valuations and limited reform momentum.

Yet the fundamental picture is more nuanced.

Nifty 50 profits grew 18% in the latest quarter and foreign funds have bought more than $4 billion of Indian shares this quarter.

Indonesia, meanwhile, has improved from 32% to 27% net underweight as the JCI rebounds from its June lows.

The key message is therefore not simply that India lost and Indonesia won.

It is that global fund managers are becoming increasingly selective—favoring markets that combine earnings growth, reasonable valuations, macro stability and direct exposure to the AI-driven investment cycle.