A recent survey conducted by Bank of America among fund managers indicates that India has overtaken Indonesia to become Asia's least favoured stock market, signalling that investors are increasingly cautious about a market that has been the worst performer globally this year.

According to the survey, the primary concern remains India's lack of a clear artificial intelligence (AI) strategy, with sluggish economic growth emerging as a secondary risk. The findings show that 32% of respondents hold a net underweight position on Indian equities. Additionally, delayed reforms and high valuations are contributing to the bearish sentiment towards Asia's fourth-largest stock market.

In contrast, sentiment towards Indonesia has improved, with 27% of fund managers reporting a net underweight stance, down from 32% in July. Taiwan and Japan continue to be the most preferred regions among investors. The survey gathered responses from 98 participants managing a combined USD 272 billion in assets between August 7 and August 13.

Despite an improving earnings outlook, the survey results align with the downturn in Indian stocks over the past two weeks, suggesting that investors remain wary even as market fundamentals strengthen.

Data reveals that after record outflows in the first half of the year, global funds have purchased more than USD 4 billion worth of Indian local stocks this quarter, the highest among regional emerging markets. Over the last three months, earnings of Nifty 50 index constituents jumped 18% year-on-year, surpassing the 10% estimate projected by Motilal Oswal Financial Services Ltd.

In the May Bank of America survey, India was also listed as the least favoured market, when rising global crude oil prices due to the US-Iran conflict put pressure on India's economic growth through higher energy costs. With no progress in resolving the conflict, energy prices have climbed again, dampening investor sentiment.

Although the Nifty 50 index has risen 8% from its recent low in March, it still ranks second from the bottom among major Asian markets with an 8% decline year-to-date. The index faces the risk of ending its historic streak of ten consecutive years of annual gains.

Meanwhile, the improved sentiment towards Indonesia is reflected in the Jakarta Composite Index, which has rebounded over 20% since its June low. This is supported by central bank measures to stabilise the currency and fading concerns about a potential downgrade to frontier market status by MSCI Inc.