D-St to act as hedge for funds looking to trim global AI play, say analysts

The funds that once chased global artificial intelligence (AI) and semiconductor-related stocks in emerging and developed markets will look to return to India, analysts said.

 

Analysts are growing cautious about the surge in semiconductor and AI stocks, warning that stretched valuations may signal a bubble. The Philadelphia Semiconductor Index is valued at 53.5 times price to earnings (P/E), above the 10-year average of 28.4 times, according to Bloomberg.

 

So far this year, the gauge for semiconductor-related stocks -- the Philadelphia Semiconductor Index -- is up 40 per cent, while the Magnificent 7 index and the tech-heavy Nasdaq 100 have risen by 24 per cent and 22 per cent, respectively. 

 

During the same period, the S&P 500 index has risen 16 per cent, while back home, Nifty50 is up 9.5 per cent.

 

In major names, Samsung Electronics Co. in South Korea is up 95 per cent and Taiwan Semiconductor Manufacturing Co. in Taiwan has risen 37 per cent this year.

 

On Wall Street, Nvidia Corp. is up 40 per cent and Advanced Micro Devices Inc. is up 97 per cent.

 

However, from their peak, the Philadelphia Semiconductor Index and the Magnificent 7 index have fallen about 5 per cent.

 

The easy money, according to Christopher Wood, global head of equity strategy at Jefferies, has now been made in the AI capex ‘picks and shovels’ trade. And so far, most money in AI has been made by the likes of Nvidia, Hynix and Micron, Wood said.

 

“The growing discussion of an AI bubble is a sign that the peak may not yet have arrived in stock market terms. Indeed, GREED & fear has been referring to AI capex “mania” rather than a bubble since the main drivers of the capex, namely the hyperscalers, have been primarily spending cash, not borrowing money,” Wood wrote in his weekly note to investors, GREED & fear.

 

Is India a good AI hedge?

 

Kotak Institutional Equities, in a recent report, noted the recent correction comes amid growing concerns that the market may have run too far ahead of fundamentals.

 

“This mismatch has prompted investors to reassess valuations, especially as rising interest rates and higher capital costs make future profits less attractive,” the report said.

 

The brokerage positions India as a “relatively safe haven” in this global AI correction.

 

If the global rally in AI-linked stocks, particularly in the US, Taiwan, and Korea, moderates, some of those flows could shift to India, Sanjeev Hota, director-head of Equities Strategy, Standard Chartered Securities India, said.

 

“India has never been an AI-driven market. It remains a domestically focused economy. However, funds seeking short-term higher returns have moved to AI-heavy markets. If that trade begins to cool, we expect the money to flow back to India,” Hota said.

 

In a recent note, Herald van der Linde, head of equity strategy, Asia Pacific, HSBC, said that many investors were talking about

feeling uncomfortable with the crowded positioning in AI.

 

“We believe India is a good AI hedge and provides diversification for those who feel uncomfortable with the AI rally,” he said.

 

India’s relative underperformance has been due, in part, to the global AI trade, which drew funds away to markets like the US, Taiwan, and South Korea, said Ajay Bodke, independent market analyst.

 

“However, that trade appears to be moderating now. Recent upgrades by global brokerages such as HSBC and Goldman Sachs, which have turned overweight on India, suggest the tide is turning,” Bodke said.