India could be the next destination for global money as AI trade cools: Matt Orton

Question

You’ve generally held a positive view on the entire artificial intelligence (AI) upmove that has taken place so far. Last week or so, we started to see bits of that come under question. Not necessarily that it would be brittle or fizzle out, but there were episodes of decline. Now, with the developments that have taken place in Nvidia, do you think questions will continue, and that means maybe the upside to the AI trade is limited for now?

Answer:

I think this is becoming a more nuanced trade. Over the past couple of months, we’ve really talked about the need to be more selective within the broader AI complex. It’s never going to be a straight, linear line upward. I think the reaction that we’ve had, both to politics and elections in the US, as well as to what have been pretty good earnings results, but maybe just not good enough for the bar that the market has set, has really caused a forced correction. But I think it provides investors a longer-term opportunity to get into some of these names at discounts. The key is really what investors need to look at: that second derivative of earnings. Where is earnings growth moving? Is it accelerating or is it starting to slow? Earnings growth numbers are quite impressive across the entire complex, but there are a lot of pockets where you are seeing a deceleration in that rate of growth. I think investors really need to focus on identifying the names where there continues to be an acceleration of growth and good visibility. But I don’t think the trade is done. I think it’s taking a pause, and investors should use downside opportunistically while also continuing to look for ways to balance their portfolios and help insulate from some of these big, dramatic moves.

Question

So, what is the base case right now? There are so many paths to tech. There are hyperscalers, chip stocks, cybersecurity and many others. What is the space that you’re comfortable with, with the possibility that earnings growth slows down? And just to close that point about Nvidia, is what’s happening with Nvidia a risk for the stock and the global AI trade, because it is the face or poster boy of AI?

Answer:

I don’t think what we’re seeing with Jensen Huang is a risk to the AI trade. If the market trades down on that, I think that would be a viable opportunity because we know China has been smuggling in Nvidia chips. China has been copying all of the models from our own frontier labs. There’s no surprise at all that China is trying to rapidly adopt what the US is creating from an AI perspective. So, this does not change the narrative at all, in my opinion. But where you want to look within the technology trade to maybe find areas where the baby has been thrown out with the proverbial bathwater, I think number one is cybersecurity. We know through everything that has transpired over the past month or so that we need more cybersecurity and that AI creates more pronounced threats across the world. The earnings resilience we’ve seen across these companies is very, very strong, and I would expect that to accelerate. Also, we know that there’s a significant memory shortage. Whether or not data centers get slowed down, we know there are permits and contracts signed through at least 2028, and these data centers are going to be built. The need for memory is very, very strong. So those are two areas that I would be looking at within AI to potentially add to on some weakness once we start to see the market level off. I would not be sticking my neck out right now. I’d be looking for signals for the market to stabilise, and then once we start to see things move up, that’s when I would look to add to positioning.

Question

You don’t believe that what’s going on with Jensen or with regard to the AI trade has permanently hit a roadblock, maybe only temporarily in the near term. That said, a lot of our viewers would like to know your view on the Indian markets. You have been very bullish on the Indian markets, which has held you in good stead. As of current reckoning, what would you do? Where would you allocate money in the Indian markets? Crude oil prices have cooled off. You’ve been bullish on InterGlobe Aviation and some of the private sector banks. What’s new on the list, or what would you look to add to?

Answer:

India has proven its worth as a diversifier. We talked about how, when we’ve seen this AI trade sell off, India has been a wonderful ballast to portfolios. Again, for those investors who have been selective, this has not been a bad year at all for investing in Indian markets. I think, number one, we’ve talked a lot about ICICI Bank. The rally that it’s had over the past couple of weeks has been incredibly strong. I wouldn’t be looking to add to it now. I would be waiting for weakness or any sort of pullback, and then I would add to my positioning there because it’s clear that it has been grossly undervalued by the larger market, and foreign flows should help that as well. I also think that there could be opportunities starting to emerge in the tech space. It’s been an area that I really haven’t liked for a while, but some of the results we’re seeing outside of the really large international behemoths have been pretty good. What we’ve seen from Tech Mahindra has been encouraging. I think some of the results, even from TCS, have been okay. And okay, I think, is good enough when a sector has been as beaten down as we have seen in the Indian IT services area. Again, I would look for a continuation of the rally in some of those areas, but they look very strong. And if oil prices do stay a little more subdued, I’ve been incredibly bullish on Eternal and Paytm. Those are two names that I like a lot. Again, on weakness, I would be looking to add to my positioning in both of those names.

Question

Now that you’ve spoken about India, I wanted to understand whether, among the people that you speak to, they are getting incrementally positive as well. There has been some money coming to the Indian markets as AI gets a lot more nuanced. Do you think people will start to diversify out of AI-related emerging markets?

Answer:

I think so. I’ve actually been travelling around the world for the past two weeks, meeting with clients as we had this sort of AI meltdown, and I’ve been very positively surprised by the willingness to discuss other markets outside of the US. India does come up in conversations because it has a negative correlation to the S&P 500. So, when we talk about ways that you can get diversification from the overall AI trade or more pro-growth US markets, India does make a lot of sense, especially because it has been so beaten down over the past year. I think, as well, what is working for India is the fact that it looks like maybe there’s a light at the end of the tunnel with respect to geopolitics. I wouldn’t hold my breath in the very short term, but things are continuing to get marginally more constructive, and I think that changes the narrative with respect to India. Especially when you look at all the gains in emerging markets, they have accrued to Taiwan and South Korea. Those stories look a little bit long in the tooth right now. So where does the marginal dollar go? Likely not to China, but it’s going to India. I think that is going to be sustainable, especially when investors are willing to think, I don’t necessarily need to outperform the S&P. I need to diversify and find a way where I can selectively still do very well, but not be subject to the whims of the AI trade.