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India's Dominance in Asia Ex-Japan Funds Creates Concentration Risk, Warns Jefferies

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  Published in Stocks and Investing on Monday, January 5th 2026 at 2:25 GMT by Business Today

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India’s Dominance Hurts Asia Ex-Japan Fund Performance: Jefferies Report Highlights Concentration Risk

A recent report by investment bank Jefferies has flagged a concerning trend within Asia ex-Japan long-only equity portfolios: excessive exposure to Indian stocks is significantly hindering overall performance, particularly in the face of potential market corrections. The report, released on January 5th, 2024, paints a picture of concentrated risk and diminishing diversification benefits for funds heavily reliant on India's booming stock market.

The Problem: India’s Outsized Influence & Portfolio Concentration

Jefferies analysts led by Alicia Yao found that the average Asia ex-Japan long-only portfolio now holds approximately 35% exposure to Indian equities. This is a dramatic increase from around 20% just five years ago. While India's stellar performance has undeniably boosted returns for many funds, this high concentration creates significant vulnerability. The report emphasizes that this level of exposure effectively makes these portfolios de facto India-focused funds, losing the diversification benefits typically associated with broader regional strategies.

"We believe Asia ex-Japan long-only portfolios are now too heavily weighted to India," Yao wrote in the report. "This concentration risk is not being adequately priced by investors." The analysts argue that this overexposure has masked underlying weaknesses within other Asian markets and created a situation where any significant downturn in Indian equities could disproportionately impact fund performance.

Why India's Rise Became a Risk Factor

India’s remarkable stock market rally, fueled by factors like robust economic growth (projected to remain strong), government reforms, increasing domestic retail participation, and substantial foreign institutional investment, has been the primary driver of this concentration. The Nifty 50 index, representing India's top 50 companies, has consistently outperformed other regional benchmarks. This performance created a "fear of missing out" (FOMO) among fund managers, leading them to increase their allocations to Indian stocks to keep pace with peers and benchmark returns.

However, Jefferies points out that this rapid growth also makes India more susceptible to corrections. Valuations in certain segments of the Indian market are considered stretched, particularly in sectors like financials and technology. A slowdown in global economic growth, a change in investor sentiment towards emerging markets, or any adverse policy changes within India could trigger a significant correction, impacting funds with high Indian exposure.

The Impact on Fund Performance & Investor Expectations

The report’s analysis reveals that the performance of Asia ex-Japan long-only funds has become increasingly correlated with the performance of the Indian market. This means that even if other Asian markets are performing well, a negative event in India can drag down overall fund returns. Furthermore, investors may be overestimating the diversification benefits they're receiving for the fees they’re paying.

The analysts also highlight that this concentration risk isn't always transparent to investors. Many funds don't explicitly disclose their Indian exposure, making it difficult for retail and institutional investors to fully understand the risks they are taking. This lack of transparency is a growing concern within the investment community.

Jefferies’ Recommendations & Potential Solutions

Jefferies recommends that fund managers actively reduce their Indian exposure and rebalance portfolios towards other promising markets in Asia ex-Japan, such as China (despite its current challenges), South Korea, Taiwan, and Southeast Asian nations like Indonesia and Vietnam. They suggest a target allocation of around 20-25% for India to better align with the region's economic weight and reduce concentration risk.

The report also suggests that fund managers should be more transparent about their Indian exposure in marketing materials and prospectuses. This would allow investors to make informed decisions based on a clearer understanding of the risks involved. Furthermore, Jefferies believes that active management strategies, which can dynamically adjust allocations based on market conditions, are better suited for navigating this environment than passive index-tracking funds.

Broader Context & Implications

This report adds to the ongoing debate about the sustainability of India's stock market rally and the risks associated with concentrated investment strategies in emerging markets. It underscores the importance of diversification, even when a particular market is experiencing exceptional growth. The situation also highlights the challenges faced by fund managers who are pressured to deliver strong returns while maintaining risk management principles.

The report’s findings have implications for both institutional investors and retail investors. Institutional investors managing large portfolios need to reassess their Asia ex-Japan allocations and consider reducing Indian exposure. Retail investors should carefully review the prospectuses of funds they invest in, paying close attention to country allocation data and understanding the potential risks associated with concentrated strategies. While India remains a compelling investment destination, relying too heavily on its performance can be a recipe for disappointment if market conditions change.

To read more about related topics:

• Jefferies Report (Original Source): [ https://www.businesstoday.in/markets/stocks/story/jefferies-says-2025-asia-ex-japan-long-only-portfolio-hit-by-high-india-stock-exposure-509393-2026-01-05 ]
• Nifty 50 Index: (Search online for information on the Nifty 50 index and its performance.)