BofA's latest Asia fund manager survey reveals a significant restructuring of regional market sentiment. Japan has secured its position as investors' most favored market for the 27th consecutive month, while India has shifted from a slight overweight last month to a slight underweight. The long-term structural narrative for the Chinese market has reversed, with investor optimism about its prospects reaching the highest level since the survey began.
According to the tracking data, in this January survey covering 112 fund managers overseeing $280 billion in assets, return expectations for the Asia-Pacific ex-Japan market surged to the 92nd percentile historically, hitting a two-year high. Global growth expectations climbed to their highest level since October 2021, while inflation expectations remained low at the 29th percentile historically, providing room for Asian central banks to maintain a dovish policy bias.
The semiconductor sector continues to dominate investor preferences, with 54% of respondents overweight the sector, ranking it first among all industries. In the Chinese market, the popularity of AI and semiconductor themes reached a new survey high, with 66% of respondents listing them as their most favored themes. This trend is also pronounced in markets like Japan, South Korea, and Taiwan, with the proportion of respondents expecting a stronger semiconductor cycle nearing a three-year high. India's cooling appeal may reflect investor disappointment over delays in its trade agreement with the US. In contrast, excluding Japan, investors maintain a constructive stance on Taiwan and South Korea, benefiting from firm expectations of a strengthening semiconductor cycle. Japan continues to lead with moderate policy expectations. Japan, with a net 54% overweight allocation, remains at the top of investor preferences, holding the position as the regional favorite every month since being included in the survey in October 2023. Investors are raising their market return expectations, with focus centered on the potential productivity-enhancing policies from the government aimed at achieving economic growth and fiscal consolidation through active investment in growth areas.
Monetary policy normalization is currently a secondary concern, with two-thirds of respondents expecting the Bank of Japan's next rate hike to occur in June. The outlook for the Japanese economy is optimistic, with 63% of respondents expecting the economy to "strengthen slightly" and 21% expecting it to "strengthen substantially," while almost no one anticipates economic weakness. In terms of sector allocation, banks and semiconductors remain investors' top picks in the Japanese market, with 50% and 38% of respondents, respectively, overweighting these two sectors. Banks are key beneficiaries of rising interest rates, while semiconductors are core assets within the AI investment theme. Return expectations for the Japanese market have risen to the highest historical quintile, with 33% of respondents anticipating returns exceeding 10% over the next 12 months. China's narrative reverses as household risk appetite recovers. The Chinese market is undergoing a significant sentiment shift. Growth momentum is stabilizing and gradually improving, with a net 13% of respondents expecting the Chinese economy to strengthen, a sharp reversal from the net 29% expecting economic weakness last November.
More importantly, the proportion of respondents who believe Chinese equities are in a structural de-rating process has fallen to 38%, the lowest level since the survey began. Household risk appetite is beginning to recover, with 58% of respondents believing Chinese households will prioritize allocating assets (stocks, bonds, or real estate) over depositing funds into savings accounts. The dominance of AI and semiconductor themes in the Chinese market has further intensified, with 66% of respondents ranking them as the most favored theme, a new survey high. Internet and anti-involution themes tied for second place, each with 21% support. Concurrently, 83% of respondents expect further monetary policy easing in China, a proportion that remains elevated.
Regarding investor positioning, 21% of respondents stated they are "building exposure," with a significant proportion maintaining an actively engaged attitude. This stands in stark contrast to the widespread avoidance of the Chinese market by investors during the 2021-2023 period.
Semiconductor cycle expectations heat up as India shifts to underweight. The semiconductor sector's overweight allocation across the Asia-Pacific ex-Japan market reached 54%, far exceeding other sectors. Technology hardware, industrials, and financial services followed with net overweight allocations of 50%, 33%, and 21%, respectively. In contrast, real estate, utilities, and non-retail consumer staples were the least favored sectors, with net underweight allocations of 29%, 25%, and 13%, respectively.
The net proportion of respondents expecting the semiconductor cycle (measured by South Korea/Taiwan export growth) to strengthen rose to 58%, nearing the highest level since July 2024. This expectation underpins investors' constructive stance on the Taiwanese and South Korean markets, which have net overweight allocations of 25% and 21%, respectively. The Indian market shifted from a slight overweight last month to a net 8% slight underweight, likely reflecting investor disappointment over delays in its trade agreement with the US. Among Southeast Asian markets, Malaysia, Singapore, and New Zealand maintained neutral allocations, while Thailand, Indonesia, and the Philippines remained underweight. Optimism runs high while valuations still appear reasonable. The surge in market return expectations is supported by a strong earnings rebound. A net 63% of respondents expect corporate earnings for Asia-Pacific ex-Japan to improve, a figure at the 84th percentile historically. Meanwhile, only 17% of respondents believe consensus EPS estimates are too high, leaving room for future earnings upgrades.
Despite high return expectations, respondents generally view regional equity valuations as broadly reasonable. A net 17% of respondents consider Asia-Pacific ex-Japan equities to be undervalued, rather than overvalued. This "Goldilocks" scenario—characterized by strong growth expectations, a mild inflation outlook, and reasonable valuations—provides support for continued market gains. The strengthening of global growth expectations is a key driver of the optimistic sentiment. The economic outlook for Asia-Pacific ex-Japan climbed to a two-year high, while Japan's growth expectations remained near their survey peak. With inflation expectations staying low, central banks in Asia ex-Japan retain the space to maintain a dovish bias, providing additional policy support for the markets. The survey was conducted between January 9 and 15, 2026, involving a total of 227 fund managers overseeing $646 billion in assets. Among them, 112 fund managers managing $280 billion in assets responded to the regional-specific questions.
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