AI, stretched smallcap valuations, oil risks: Where investors should do

DSP Mutual Fund's outlook warns that AI exuberance and oil price volatility risk is disrupting the global landscape, suggesting a strategic pivot toward largecaps, debt and undervalued IT stocks

Artificial intelligence (AI) spending, stretched small and midcap valuations, and the risk of rising crude oil prices are shaping the global investment landscape, according to DSP Mutual Fund’s latest market outlook. As markets enter a more mature phase, the report recommends a strategic shift toward overlooked segments, including largecaps, select information technology (IT) stocks, and debt.

 

AI investment boom dominates global markets

 

The report highlighted the scale of global investments in AI infrastructure. Capital expenditure (capex) by technology giants Apple, Microsoft, Amazon, Alphabet and Meta has expanded at a compound annual growth rate of around 32 per cent since 2019.

 

 

The five companies have spent in half a decade more than $1 trillion on capex, much of it for AI development and data infrastructure.

 

Companies connected to the “AI ecosystem” have a combined market capitalisation of $25 trillion to $28 trillion, nearly a quarter of global gross domestic product (GDP).

 

Such concentration boosted equity markets, but raises the risk that any slowdown in the AI cycle or earnings disappointments could have an “outsized impact” on global indices, said the report.

 

Oil remains a key macro risk for India

 

For India, crude oil price is one of the most critical external risks. The country consumes around 5.3–5.5 million barrels of crude oil per day but produces only about 0.6 million barrels, making it heavily dependent on imports.

 

Oil comprises 25–30 per cent of India’s total imports. Every $10 increase in crude prices could raise India’s annual import bill by about $12 billion to $15 billion, said the report.

 

If oil prices were to rise above $120 per barrel and remain there through FY27, India’s oil trade deficit could increase to around $220 billion, pushing the current account deficit beyond 3.1 per cent of GDP.

 

Historically, such episodes have triggered currency depreciation, higher inflation and tighter liquidity conditions.

 

Smallcaps still expensive despite correction

 

Within domestic equities, the report points out that small and midcap valuations remain elevated despite recent moderation. The median price-to-earnings multiple for these stocks currently stands near 36 times, well above the long-term average of about 20 times.

 

Historically, during deeper market corrections these multiples have fallen to single-digit levels, creating strong entry opportunities for long-term investors.

 

Where opportunities may emerge

 

The report indicates that some of the more promising areas may lie in segments that have underperformed recently.

 

Largecap stocks: Their share in the overall market capitalisation is close to multi-year lows, which could make them relatively attractive compared with smaller companies.

 

Indian IT companies: Despite strong return on equity and cash flows, a large portion of the sector is trading below the 33rd percentile of historical valuations.

 

Debt and balanced asset allocation: With real yields in India near the top of their historical range, fixed income could play a stabilising role in portfolios.

 

Investment discipline remains key

 

Investors should avoid “chasing crowded themes or recent winners and instead focus on valuation discipline, diversification and long-term asset allocation”.

 

“In an environment shaped by AI enthusiasm, stretched valuations in parts of the market and global macro risks, a cautious and diversified investment approach may be more prudent for investors,” said the report.