A growing sell-off in major US technology stocks, particularly those heavily invested in artificial intelligence, is sending ripples across Wall Street and Asian markets. Investors are increasingly concerned about whether the massive capital expenditure by tech giants into AI infrastructure will deliver expected returns, leading to a significant unwinding of the 'AI trade'.
US Tech Giants Face AI Investment Scrutiny
The tech-heavy Nasdaq Composite index has seen a notable decline, with major players like Meta, NVIDIA, and Alphabet experiencing significant drops. Other chip-related stocks such as Broadcom, Advanced Micro Devices, and Micron Technology have faced even deeper corrections. This trend extends to Asian markets, impacting giants like Samsung Electronics and SK Hynix, which have also seen substantial losses.
Manish Sonthalia, director and chief investment officer at Emkay Investment Managers, notes that the AI trade is beginning to unravel. He attributes this unwinding as a key factor behind the recent correction in global 10-year bond yields, as investors shift towards safer assets away from riskier technology plays.
Capex Concerns and 'Late-Cycle' Warning
UBS highlighted investor concerns regarding the returns on AI investments, citing rising capital expenditure relative to cash flows and uncertain monetization strategies within the Asia tech supply chain. Elon Musk echoed these sentiments on X, warning that debt markets are tightening for companies without substantial revenue independent of AI data centers, predicting consolidation among smaller 'neoclouds'.
Nuvama's recent strategy note suggests that high interest rates are weighing on the AI trade, which is exhibiting characteristics akin to the dot-com era's 'late-cycle' mania. This includes high valuations and leveraged retail participation, further bolstering a contrarian shift towards the Nifty index over broader emerging markets.
Can India Capitalize on the AI Trade Unraveling?
The question of whether pain in the AI sector translates to gains for India is complex. V K Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, suggests a potential upside. "The weakening of the AI trade is positive for India. In September and October, so far, the capital flight from South Korea and Taiwan from FPI selling is more than the capital outflow from India. This is an important trend," he observed.
India's Own Economic Headwinds
However, India faces its own set of challenges. Nuvama points to moderating margins, fading inventory gains, RBI rate hikes amid weak incomes, El Niño effects, and the diminishing tailwind from GST cuts as potential risks to domestic growth. These factors have led to India's post-Covid outperformance relative to emerging markets largely disappearing, with 20-year returns nearly converging.
Bernstein also noted that India's earnings are not seeing upward revisions for the fiscal year 2027, with several sectors still experiencing cuts. The brokerage believes that while a lower long-term capital gains (LTCG) tax could be desirable, it alone is unlikely to drive sustained foreign institutional investor (FII) inflows without a recovery in India's growth and earnings cycle, which remains elusive.
Ultimately, Bernstein concludes that India is unlikely to materially benefit from a near-term pause in the AI trade, as it currently offers neither the return profile nor the specific investment opportunities that are attracting global capital into AI today. The path to significant portfolio gains may still be some time away.