US May Question AI Returns; India Story Still Evolving

The artificial intelligence (AI) boom that has powered global stock markets, especially in the United States, could face tougher scrutiny this year, according to Christopher Wood, Global Head of Equity Strategy at Jefferies.

Speaking at the BS Manthan Summit in New Delhi, Wood said US markets may begin questioning whether large technology firms will generate adequate returns from massive AI-related capital expenditure.

AI Capex Under the Spotlight

Wood noted that the current AI investment cycle began around three years ago, when major technology firms stepped up spending in response to competitive pressures in generative AI.

He said four major “hyperscalers” are expected to spend about $620 billion on AI-related capital expenditure this year. While this spending has fuelled a rally in semiconductor-heavy markets such as Taiwan and South Korea, it has also raised questions about return on investment (RoI).

According to Wood, companies that were once asset-light have now become asset-heavy due to large investments in data centres and infrastructure. He believes markets may increasingly assess whether these investments can deliver sustainable returns.

If investors conclude that AI spending has led to overcapacity and excessive capital outlays, Wood suggested there could be a sharp correction. In such a scenario, India may regain relative strength.

“For now, India is a reverse AI trade globally,” he said, indicating that global capital has moved towards markets more directly linked to AI hardware manufacturing.

India’s AI Opportunity

Nilesh Shah, Managing Director at Kotak Mutual Fund, offered a different perspective. He said India’s AI journey is still evolving.

Shah acknowledged that India may not become a major player in large language model (LLM) development. However, he believes India’s strength lies in building applications and small language models (SLMs) tailored to specific use cases.

He added that both large companies and startups in India are actively working on AI-driven solutions.

IT Stocks and Market Reaction

Addressing the sharp fall in Indian IT stocks, Shah described the scale of selling as surprising. He pointed out that despite the correction, there has been no significant insider selling by IT promoters or senior executives.

Shah said long-term growth expectations, rather than near-term earnings, are driving stock price movements. According to him, small changes in projected long-term growth rates can significantly impact valuations.

The key question, he added, is whether Indian IT services companies will play a constructive role in helping global firms adopt AI solutions or face disruption.

FII Flows and Global Allocation

Wood also commented on foreign institutional investor (FII) flows. He said global funds had earlier maintained strong exposure to India, especially within emerging markets.

However, as the AI-driven semiconductor trade gained momentum, capital shifted towards markets like Taiwan and South Korea. Renewed interest in Chinese equities also contributed to reduced allocations to India.

According to Wood, India’s relative market performance will depend partly on how the global AI cycle unfolds.

AI and Fund Management

On fund management, Shah said artificial intelligence is transforming investment research and asset allocation. He noted that advanced computational tools are increasingly being used to analyse data and detect patterns.

However, he added that uncertainty remains about how AI will reshape roles within the investment industry.

Both speakers agreed that AI will remain a defining theme for global markets, but the sustainability of current investment levels will determine how capital flows evolve in the coming years.