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With or without AI

The exponential growth in market cap. of AI-related stocks in major DMs and select EMs has been the key driver behind their recent large outperformance versus RoW. The negligible presence of India in the AI-value chain and high share of ‘traditional’ sectors in the Indian market may result in the Indian market being shunned by global investors until the AI excitement moderates.

AI-driven stocks have been the primary driver of market cap. in major countries

The sharp increase in the market cap. of global technology stocks, primarily driven by their exponential spending on AI-related computing power, has resulted in the AI-related stocks and AI-heavy markets outperforming global indices (see Exhibit 1). The major AI-related listed companies in the US, China, Japan, South Korea and Taiwan contributed 14-58% of the incremental market cap. of these countries over the past three years (see Exhibits 2-6). The recent announcements of AI-related stocks (see Exhibit 7) and consequent increase in stock prices suggest that global markets continue to chase the narrative.

Market cap. of India continues to be dominated by ‘traditional’ industries

Our analysis of the market cap. of top-25 Indian stocks over the past three years shows that the Indian market continues to be dominated by traditional (or even sunset) sectors (see Exhibit 8). We note that most of these companies have delivered modest revenue/moderate PAT growth over the past three years, even as they continue to enjoy elevated multiples (see Exhibit 9). The market’s expectation of Indian stocks appears to be driven solely by expectations of industry growth led by per capita income growth.

The ongoing decline in global cost of capital may continue to benefit AI-theme

The recent cut in US Federal Fund rates, with expectations of a 50 bps cut in interest rates over the next 12 months (see Exhibits 10-11), is likely to reduce the global cost of capital over this period. This could sustain the market’s faith in the AI narrative and allow global risk capital to continue to take an expansive view of (1) the large investment into computing power by AI-related companies and (2) the low cashflow generation of AI-related stocks. Exhibit 12 shows the current market cap. of AI-value chain versus major markets.

India may not benefit much from an increase in foreign flows of risk capital