Valuation of AI stocks, volatility pose risks for investors: Fund managers

Fund managers cautioned investors against chasing artificial intelligence (AI)-linked stocks amid elevated valuations. They urged investors to maintain disciplined asset allocation as global markets remain volatile. Speaking at the Business Standard BFSI Insight Summit in Mumbai on Wednesday, they also highlighted the importance of looking beyond recent market returns and focusing on long-term fundamentals.

At a panel discussion titled ‘Navigating Uncertainties & Volatile Markets’, moderated by Business Standard's Pravin Palande, chief investment officers from leading mutual fund houses discussed the outlook for AI investments, the case for Indian and international equities, and the importance of disciplined asset allocation amid global volatility.

Harish Krishnan, CIO, Equity, Aditya Birla Sun Life AMC, said AI represented a genuine technological shift, but investments in the sector would need to translate into meaningful economic benefits over the next 12–18 months to justify expectations.

“Is the technology real? Absolutely. Are we using AI to get better signals, make workflows more efficient and improve investment decisions? Absolutely, yes,” he said.

However, he cautioned that investors chasing the AI trade could face disappointment if companies failed to deliver meaningful applications and benefits. “There are images of the dot-com bubble which come in very fresh at the extent of overcapacity,” Krishnan said, adding that he could not predict whether a correction would happen in the current quarter or several quarters later.

R Sivakumar, CIO, Axis AMC, was more categorical about the risks, pointing to excess capital flowing into a narrow set of sectors and concerns over AI’s economics. “There is overcapacity. There is too much technology transformation,” he said, adding that the companies that would ultimately make significant money from AI might not yet have emerged.

Sankaran Naren, executive director and CIO, ICICI Prudential AMC, said AI stocks appeared overvalued, but timing the market remained difficult. “The problem is not that AI is real. It is just an implied growth assumption model of investing, which is a problem,” he said, adding that asset allocation was important because investors could not know how long elevated valuations would persist.

Taher Badshah, president and CIO, Invesco Mutual Fund, said the market remained in an AI supercycle, although shorter cycles within it were possible. He also highlighted the wider implications of AI investments, including their demands on resources such as water, power and rare earths, as well as the geopolitical competition surrounding the technology.

Nimesh Chandan, CIO, Bajaj Asset Management, said the AI trade had expanded to include a growing number of businesses supplying or enabling hyperscalers, from chipmakers and memory manufacturers to power utilities and capital equipment suppliers. This had increased the concentration of market capitalisation and fund allocations linked to the AI theme, raising the risk that the trade could become narrower, he said.

The next phase could favour companies that use AI to improve revenue, productivity and shareholder returns, rather than only those supplying the technology infrastructure, Chandan said. 

The panellists also highlighted the behavioural mistakes investors tend to make during volatile markets, particularly when they become anchored to headline indices or chase assets that have delivered strong recent returns.

Chandan said the past two years of volatility had followed a period of strong market gains, leaving some investors frustrated. He said the Nifty 50’s performance had influenced sentiment even as small- and mid-cap stocks had reached new highs in the preceding month.

“It is very important during these times to stick to your process with discipline,” Chandan said, recommending investment checklists, behavioural tools and pre-committed allocation decisions to help investors avoid emotionally driven choices.

Naren said investors needed to look beyond past performance and take a contrarian approach when warranted. “To make money in the long run, you have to actually bet against the money flow,” he said, adding that investors needed to be more careful with small- and mid-cap stocks and less cautious about large-cap stocks in the prevailing market environment.

Badshah said investors should avoid making portfolio decisions based solely on market headlines and instead maintain a balance between value-oriented stocks and businesses with strong growth prospects. He said the broader Indian market continued to offer opportunities through newer businesses and differentiated business models, adding that a balanced portfolio could help investors navigate challenging macroeconomic conditions.

Krishnan said investors should distinguish between sectors where expectations were already high and those where sentiment remained weak. He identified capital markets, defence and capital goods as areas where elevated expectations warranted greater caution, while pointing to technology, consumer businesses, private sector banks and insurance as segments where expectations were relatively subdued. 

The panellists also cautioned against making investment decisions based solely on recent market performance, particularly as global equities have outperformed Indian markets in recent periods.

Krishnan said currency depreciation alone was not a sufficient reason to move away from Indian equities. He favoured selective international diversification into areas where Indian businesses had limited exposure, such as biotechnology and AI. However, he did not see a case for international investments exceeding 10 per cent of a portfolio.

Sivakumar said investors should assess markets based on their long-term earnings growth prospects rather than short-term performance. While he favoured maintaining a significant allocation to India, he also encouraged investors to participate in the global AI opportunity without changing their domestic equity allocation solely in response to overseas market movements.

Naren said investors needed to resist the temptation to chase markets that had performed well in the recent past. “To make money in the long run, you have to actually bet against the money flow,” he said, arguing that investors should pay greater attention to valuations and market cycles rather than simply follow the direction of fund flows.