US markets may start to question RoI from AI; India story still unfolding

AI capex boom may keep India markets under pressure as global funds shift to semiconductor-heavy markets like Taiwan and Korea, says Christopher Wood of Jefferies

The artificial intelligence (AI)-driven trade, which has dominated the stock markets, especially in the United States (US) could come under the lens this year, Christopher Wood, global head of equity strategy at Jefferies, said on Tuesday. 

However for India, the 'AI story, according to Nilesh Shah, managing director at Kotak Mutual Fund is still unfolding. From a stock market standpoint, so long as this AI CapEx is surging, Indian markets, Wood believes, will continue to underperform. 

Speaking at the Business Standard Manthan Summit in New Delhi, Wood said the AI cycle began around three years ago - with Microsoft investing in OpenAI in 2023 - as hyperscalers responded to the competitive threat posed by OpenAI. 

"In my view, this is the year when the US stock market would start to question whether these hyperscalers are going to get any return on their investment (RoI). We started that process in the first quarter (Q1-CY26) earnings season where market questioned whether the hyperscalers will earn adequate returns because their business models have gone from asset light to asset heavy," Wood said. 

The four hyperscalers have projected to spend $620 billion as AI capex this year, which is fuelling the rally in AI stocks, especially in South Korea and Taiwan. 

That said, Wood believes that more the returns on AI capex are questioned, the more there will also be related concerns about the potential looming excess capacity in data centers. This, he believes, will in turn raise concerns regarding those funding such data center construction and related infrastructure. 

"But the day that the market realizes that they've overspent (on AI) and there's a sudden collapse in the capex, then India can start outperforming again... For now, India is a reverse AI trade globally," Wood said. 

"When we listen to the global AI companies, they say software is dead as AI can replicate what programmers took years to do. But when we come back to Indian IT companies, they say programming is just about one-fifth of their work. There is client interaction, designing, and communication among other things," Shah said. 

When asked on the way forward for India, Shah believes India is unlikely to be a major player in large language model (LLM).  "Our best bet remains in leveraging LLMs to create applications or small language models (SLMs), which provide solution to the world. In India, not just large listed companies, but small startups are also doing wonderful job in the area of AI," he said.

IT selling overdone?

The massive selling in Indian information technology (IT) stocks, Shah said, is unfathomable as all the tools which the industry has at its disposal to manage uncertainty is not working at this point of time. Despite the sharp fall in IT stocks, not even a single (IT) owner, or (IT) senior employee (who has (ESPOs), Shah said, has liquidated their position. 

"Normally, when insiders sell, you know something is wrong. However, not a single IT owner or IT senior employee has liquidated their position. In markets’ terminology, the stock prices reflect the net present value of future cash flow, which is dependent upon the terminal growth rate. As terminal growth rate goes from mid-single digit to low single digit or double digit to mid-single digit, the value changes by 30, 40, 50 per cent," Shah explained. 

While the near-term business is unlikely to be impacted, Shah believes it will not materially alter share prices. "What we need to handle is the long-term growth rate. And there, both business and the fund managers are going wrong," he said. 

Adding: Obviously, there'll be some very interesting small-caps coming out of India in the AI sphere, but in the big picture, the key relevance for investors for India in terms of AI is whether the IT services companies play a positive role enabling corporates to move to these SLMs, and that will be a viable role for the IT services companies, whether they're going to be disrupted." 

The 'brutal reality', in terms of India's performance in world markets, according to Wood, is whether India is going to do the best in terms of relative performance in world markets if literally AI story blows up tonight.

Fund management

On fund management, Shah believes luck will play an important role to define who the good fund manager will be in future as investors and fund managers may have the same / similar tools at their disposal that can be deployed for asset allocation. Going ahead, fund management, he said, will be led by people who can leverage AI to deliver solutions. 

"But the reality is we are at risk, undoubtedly. Today, the computational power which AI brings on table is unbelievable. We have joined hence with Pascal.ai, the first asset management company in India. To leverage AI for our investment research, to use AI for finding out patterns, doing better analysis of the past. 

That said, will I retain my job? I'm not sure, but we are making an attempt," Shah said.

FII exodus

Foreigners, meanwhile, according to Wood, had already left the Indian stock market dramatically, actually, as they extremely overweight India for many years as the "AI story’ started to develop across other markets. "India was the stock market that worked, particularly in the emerging markets context," Wood said. 

The AI boom, Chris Wood said, has redirected capital toward semiconductor-heavy markets such as Taiwan and South Korea, where companies are benefiting directly from surging AI-related capital expenditure. 

"Despite DeepSeek-related concerns in early 2025, the continued rise in AI spending led to a sharp rally in semiconductor stocks, prompting global fund managers to increase allocations to these markets. As a result, India -- seen as less directly linked to the AI hardware supply chain -- witnessed selling," he said. 

The AI-driven semiconductor trade and renewed interest in Chinese equities, thus, led FIIs to trim their exposure to Indian stocks.