India Becomes Asia's Least-Preferred Stock Market as Investors Favour South Korea, Taiwan and Japan; Know Why

India has emerged as the least-preferred equity market in Asia, according to a recent Bank of America (BofA) fund manager survey reported by Bloomberg. Around 32% of respondents were net underweight on Indian equities, reflecting growing caution over the country's high valuations, limited AI exposure and weaker growth outlook.

India Becomes Asia's Least-Preferred Market; Falls Behind South Korea, Taiwan and Japan

The BofA survey, conducted between August 7 and August 13 among 98 fund managers overseeing $272 billion in assets, showed that investor concerns extend beyond valuations. Fund managers also pointed to India's limited participation in the global artificial intelligence investment cycle, slower growth expectations and concerns over reforms.

By comparison, South Korea's stock market has gained nearly 60%, supported by strong semiconductor and technology stocks benefiting from the AI boom. Taiwan and Japan also remained among the preferred Asian markets.

Strong Earnings Fail to Remove Valuation Concerns

Indian companies have continued to report relatively robust financial results, but strong earnings have not been enough to revive broad foreign investor confidence.

Nifty 50 companies recorded around 18% year-on-year earnings growth in the latest three-month period, significantly above Motilal Oswal Financial Services' earlier estimate of 10%. However, investors are increasingly looking beyond recent earnings and focusing on future growth potential, valuations and India's exposure to global technology trends.

India's relatively limited number of large companies directly benefiting from the AI hardware and infrastructure boom has become an additional concern. Markets such as South Korea and Taiwan have a much stronger presence in semiconductors and other areas directly connected with global AI spending.

Crude Oil and Rupee Weakness Add to Market Pressure

Elevated crude oil prices are another major concern for Indian equities. Since India relies heavily on imported energy, a prolonged rise in oil prices can increase pressure on the country's import bill, inflation and current account balance.

The weaker rupee is also making overseas investors more cautious. Currency depreciation can reduce returns for foreign investors when their investments are converted back into dollars, even if Indian shares remain relatively stable in local currency terms.

Geopolitical tensions, including the continuing US-Iran conflict, have further complicated the market environment and increased uncertainty around oil prices and global risk appetite.

Foreign Funds Return to Indian Stocks, But Market Sentiment Remains Fragile

Foreign funds have nevertheless purchased more than $4 billion worth of Indian equities during the current quarter, giving India the strongest foreign inflow among regional emerging markets after heavy selling during the first half of the year.

However, the renewed buying has not yet translated into a broad change in investor sentiment. Much of the support for Indian equities continues to come from domestic investors and retail participation, which have helped cushion the impact of foreign outflows.

The Nifty 50 is currently around 8% above its March low, but remains approximately 8% lower for the year. If the index ends 2026 in negative territory, it would bring an end to India's decade-long run of positive annual returns.

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