Global fund managers’ outlook for the Indian stock market has become challenging for now. In Bank of America’s August 2026 Fund Manager Survey, India has taken Indonesia’s place as Asia’s least preferred stock market. This change has come at a time when signs of improvement are visible in the earnings of Indian companies, but issues such as high valuations, weak growth and the lack of clear exposure linked to AI are increasing investors’ concerns. 98 fund managers participated in the survey, who manage total assets of $272 billion.
Let us understand why global investors are cautious regarding Indian equities and what this means for the Indian market.
What’s Happening?
According to the Bank of America survey, 32% of fund managers are net underweight on Indian equities. That is, their exposure to investment in India is less than their normal or benchmark weight. India has now gone even below Indonesia, while Taiwan and Japan remain Asia’s most preferred markets.
The biggest concern behind the weak sentiment towards India is the lack of clear exposure linked to AI in Indian companies. After this, weak economic growth, limited reforms and high valuations have been considered the major risks. This is particularly important because global investors are currently searching for such markets where a clear benefit of earnings and growth from the AI theme is visible.
Even then, the picture is not entirely negative. Global funds have invested more than $4 billion in Indian equities in the current quarter, which is the highest inflow among the region’s emerging markets. This has come after record outflows. That is, investors’ concerns have certainly increased, but global capital has not completely moved away from the Indian market.
Earnings Better, Yet Why are Investors Cautious?
The biggest contradiction in the current situation of the Indian market is that despite improvement in corporate earnings, investors’ sentiment is weak. The profit of companies included in the NSE Nifty 50 increased 18% YoY in the latest three-month period. This was even better than the estimate of 10% growth.
Despite this, Indian equities have weakened in the last two weeks. In this period, major benchmarks have seen a decline of 2-3% and the Nifty 50 has recovered 8% from its recent March low, but is still about 8% down in 2026 and remains the second-worst performing market among Asia’s major equity markets.
In comparison, Taiwan and Korea equity benchmarks have risen more than 50% so far in 2026, while Japan has seen a rise of more than 26%. In such a situation, India’s weak relative performance has become an important factor for global fund managers.
Crude and FII Flow have Increased Concern
Investors’ caution towards India is not limited only to equity valuations or AI exposure. Ongoing tension in West Asia and high energy costs are also putting pressure on sentiment. In May too, India had become the least preferred market in the BofA survey, as global crude prices rose following the US-Iran war. Now, with no clear signs of resolution of the conflict, concern regarding energy prices has increased again.
FII flow is also an important part of the pressure. So far in 2026, FIIs have been net sellers of about Rs 2.40 lakh crore of Indian equities. This has come after their outflow of Rs 1.66 lakh crore in 2025. However, in the current quarter, global funds have made purchases of more than $4 billion, which indicates that the behaviour of global investors is not entirely one-sided.
Meanwhile, sentiment has improved in Indonesia. There, the share of net underweight fund managers has declined from 32% in July to 27%. The Jakarta Composite Index has also risen more than 20% from its June low.
What Does This Mean for Investors?
The most important message of this survey is that strong earnings by themselves are not sufficient to attract global investors towards the Indian market. Investors are also looking at the pace of growth, valuation, reforms and the position of Indian companies in new growth themes such as AI.
India’s 32% net underweight positioning indicates that global fund managers are for now exercising caution rather than aggressively increasing exposure in Indian equities. On the other hand, the current quarter’s inflow of more than $4 billion and 18% Nifty 50 profit growth also show that the fundamental picture of the market has not completely weakened.
Therefore, for investors it will not be sufficient only to see whether the market is falling or rising. It will be more important to understand in which direction earnings growth, valuation and global fund flows are moving together with each other.
What’s Next?
In the coming time, the sentiment of the Indian market will depend on how sustainable the improvement in corporate earnings remains and how much the major concerns of investors reduce. AI exposure, economic growth, reforms and valuations are currently the major focus areas of global fund managers.
Along with this, tension in West Asia and energy prices will also remain important. If pressure on energy costs continues, investors’ caution may continue. On the other hand, improvement in earnings and the current buying by global funds can give positive signals for the market.
Despite the Nifty 50 recovering 8% from the March low, remaining about 8% down in 2026 and the possibility of the streak of annual gains for 10 consecutive years breaking indicates that the challenge in front of the Indian market is not just of short-term volatility. For now, for global investors, the balance between growth and valuation remains the most important question in India’s story.
Disclaimer: This article is for educational and informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. The companies mentioned are cited as examples within the context of market developments. Investors are advised to conduct their own due diligence and consult their financial advisor before making any investment decisions.
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