Explained: Why India is Asia's least-favoured market among fund managers
New Delhi, Aug 20, 2026
No AI play, weak growth: Why fund managers are wary of India
Foreign fund managers have turned distinctly cautious on Indian equities, even as their optimism towards Asia-Pacific markets has risen, with India emerging as the most underweight market in the region, according to the August 2026 BofA Asia Fund Manager Survey.
The survey, conducted between August 7 and 13 among 105 regional investors managing $272 billion, shows a net 32% of fund managers are underweight India. This makes India the weakest-ranked market in the Asia-Pacific universe, below Indonesia, the Philippines and China.
At the other end of the spectrum, Taiwan and Japan are the clear favourites, with net overweight positions of 55% and 50%, respectively. South Korea follows with a 23% net overweight position. Malaysia and New Zealand were neutral, while Australia, Singapore and Thailand each recorded a net 5% underweight position. China was at -18%, the Philippines at -23% and Indonesia at -27%.
The August survey shows a clear preference for technology-linked markets, but also a shift towards defensive and value-oriented sectors as investors seek to balance the potential of the artificial-intelligence boom against concerns over valuations and the sustainability of the AI trade.
Why are fund managers cautious on India?
The biggest concern about Indian equities is the lack of a clear artificial-intelligence play.
As many Asian markets benefit directly from the AI investment cycle, fund managers appear to be questioning where India fits into that theme. The lack of an AI play was cited by 28% of respondents as their key concern about India in August, up from 18% in July.
Weak growth was the second-biggest concern at 20%, followed by lack of reforms at 16%. High valuations were cited by 4%, while a depreciating currency was a concern for 8%.
India may continue to offer long-term structural growth, but international fund managers appear to be asking a different question: which Asian market gives them the clearest exposure to the next leg of the technology and AI investment cycle?
Where are the fund managers putting their money?
The answer is increasingly concentrated in markets linked to technology and the AI ecosystem.
Taiwan is back as the AI favourite
Taiwan's appeal is closely linked to the AI investment cycle.
The country has regained the top spot as the market fund managers believe will benefit most from the next phase of the AI cycle, ahead of Japan, China, the US and South Korea.
However, investors are becoming less euphoric about the semiconductor cycle itself. The survey's measure of optimism on the Korea/Taiwan semiconductor cycle fell sharply in August, suggesting that while fund managers continue to favour the market, they are becoming more cautious about the pace of the chip upcycle.
For investors, this distinction matters: the AI theme remains attractive, but fund managers are increasingly looking for where the next leg of earnings growth will come from rather than simply buying the most obvious AI beneficiaries.
Semiconductors still dominate sector bets
Semiconductors remain the most preferred sector in Asia ex-Japan, with a net 50% of fund managers overweight.
Tech hardware follows at 32%, while healthcare and pharmaceuticals are also at 32%. Banks are next at 27%, followed by financial services at 18% and telecom at 9%.
Energy and industrials are each at 5%.
Fund managers are underweight utilities (-5%), materials (-5%), software (-5%), consumer staples (-9%), retail and e-commerce (-9%), consumer discretionary excluding retail (-18%), insurance (-18%), media and entertainment (-18%) and real estate (-32%).
That makes real estate the least favoured sector in the region, with the net underweight position at 32%.
The AI bet is moving beyond chips
The survey also gives an indication of where investors see the best risk-reward opportunities within the AI ecosystem.
Power and energy emerged as the most favoured segment of the AI value chain at 23%, followed by data-centre infrastructure at 18%, connectivity/networking at 18%, memory at 14%, software and platforms at 9% and AI compute at 5%.
This is significant because the AI investment story is increasingly spreading beyond chipmakers.
As AI data centres require enormous amounts of electricity and infrastructure, investors are looking at the companies and sectors that can benefit from the physical build-out required to support AI.
But fund managers are hedging their AI exposure
The positioning does not mean investors have turned against AI.
In fact, 59% of fund managers believe the positive impact of AI on equities is only partially priced in, while another 32% believe it is mostly not priced in. Only 5% think the AI impact is broadly fairly priced and none believe it is more than fully priced in.
But investors are increasingly protecting themselves against a reversal.
59% said they are hedging AI downside risk by rotating into value, cyclical and defensive sectors, more than twice July's level. Nearly two-thirds of investors also said they need clearer evidence of AI monetisation before increasing their exposure to AI-related stocks.
And the evidence they want is very specific: 64% said evidence of AI monetisation or revenue generation would most increase their conviction to add to AI stocks. Better valuations were cited by 14%, stronger earnings revisions by 18% and lower interest rates by 5%.
Japan remains a major fund-manager favourite
Japan is the second-most preferred market, with a 50% net overweight position.
But investors are also positioning around a major policy shift.
Nearly 60% of respondents expect the Bank of Japan's next rate hike in September, while 32% expect it in October and 9% in December. None expect the next hike only in January 2027 or later.
Japan's expected 12-month equity return has, however, moderated to 4.9% in August from 5.5% in July.
Within Japan, the investment story is heavily concentrated in banks and semiconductors, with banks reaching a historical high in investor positioning.
Earnings remain the dominant theme for Japanese equities, while the importance attached to Bank of Japan policy normalisation rose to 23%.
China: AI and shareholder returns
China remains underweight at -18%, well below Taiwan, Japan and South Korea.
However, the survey shows an improvement in expectations for China's economy in August, although optimism still trails Japan significantly.
Within Chinese equities, AI/semiconductors and buybacks/dividends remain the key investor themes, suggesting that fund managers want exposure to structural technology growth while also demanding tangible shareholder returns.
What should an investor take way?
The August survey essentially points to three baskets that global fund managers are favouring.
The first is AI infrastructure: Taiwan, semiconductors, tech hardware, memory, connectivity, data centres and power.
The second is defensive/value exposure: healthcare, banks, financial services, telecom and energy are all among the sectors with positive net overweight positions.
The third is Japan: where investors are combining exposure to banks and semiconductors with expectations of stronger earnings and monetary-policy normalisation.
India, meanwhile, is currently outside these preferred baskets, with fund managers holding a -32% net underweight position.
That doesn't mean Indian investors should automatically reduce their India exposure. But for someone building a global equity portfolio, the survey provides a useful snapshot of where institutional money is currently leaning: Taiwan and Japan over India, semiconductors and tech hardware alongside healthcare and banks, and increasingly power and infrastructure as the next way to play AI.
The survey covered 203 fund managers managing $581 billion, including 105 respondents managing $272 billion who answered the regional questions. It was conducted between August 7 and 13, 2026
[The Business Standard]
