Stock Market Outlook: Asian equity markets came under pressure on Wednesday, with Japan falling, as investors reacted to a surprise regulatory move from South Korea that rattled sentiment across the AI- and semiconductor-heavy trade.
Speaking in an exclusive interview with ET Now, Rahul Chadha, Founder and Chief Investment Officer, Shikhara Investment, said the recent volatility in AI-linked and semiconductor names was a “healthy” correction following excessive positioning and leveraged flows.
Created with AI. Errors are possible“Pullback is healthy” after frothy AI trade
Referring to stretched valuations and leveraged structures in single-stock and semi-linked ETFs, Chadha said, “We all were talking and a bit worried about these levered or double-levered ETFs, which were largely single stocks or two stocks… And the moves had got a bit frothy in the semi space. So in our funds, we were underway to the extent of five to six per cent of the semi exposure. So some pullback is good here.”
He added that the correction comes amid a broader global macro setup. “You’ve got a hawkish Fed coming here, you’ve got a huge amount of exuberance in these AI winners… Some pullback here is healthy.”
Key trigger: AI capex and earnings visibility
According to Chadha, the real focus for markets will shift to earnings and capex guidance from major AI players.
“A more important thing for the AI winners or AI trades is that in the coming results season… do we get any clues from the MAX 7 on what are they doing with the AI Capex? Are they going to maintain this Capex for next year? Are they going to ramp up?”
He warned that while demand remains strong, valuations are highly sensitive to any change in demand trajectory.
Another 5% downside possible in semiconductors
On whether the correction is over, Chadha suggested further downside risk remains. “We’ve seen 10 per cent, which happened with some of these corporate names; another 5 per cent to go.” He emphasised that earnings revisions have been “outsized” due to tight supply conditions in semiconductors, with supply response only expected later in the decade.
Korea regulatory not a serious developed market contender
Addressing concerns around South Korea, including speculation over taxation of unrealised gains and MSCI classification changes, he said the market reaction may be overdone. “Korea wasn’t serious contention for a developed market… there were issues on currency convertibility.”
On taxation concerns, he added, “One’s got to look more into it. The policymakers in Korea have been pragmatic with the new administration.”
He also noted that while large semiconductor firms like Samsung and SK Hynix have seen outsized gains, policy shifts remain uncertain.
India impact: short-term positive, medium-term questions
On implications for India, Chadha said near-term sentiment could improve as global risk appetite shifts. “Near-term, it’s positive for the markets.”
He also flagged weather-related risks including El Nino and weak reservoir levels as additional variables to watch.
FIIs shifting from old winners to new themes
On foreign investor flows, Chadha said the pattern is shifting away from traditional large cap “old winners” toward newer growth segments.
“FIIs have been selling in some of these large caps on the index heavy names, whereas FIIs have been adding exposure to some of the new age companies… manufacturing exports… internet consumer companies.”
He described the trend as a broader portfolio rebalancing driven by changing growth expectations, “At the end of the day, it’s relative earnings… there is a rebalance of portfolios happening.”
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money-related decisions.)
