Daily Voice: Anthropic’s IPO announcement and potential listing mark a peak for AI trade, at least in medium term, says Bay Capital CIO

Do you think foreign investor selling in India is nearing exhaustion, even though a near-term return of foreign inflows remains unlikely? This is difficult to predict. What is known is that foreign investors' interest in India remains muted at best. The reasons are many and by and large known. That said, if global factors align and valuations start to appear benign relative to growth, these flows can easily return.

The recent events in the Brazilian markets are also worth noting. Brazil has been an EM where foreign investors have been overweight. As Brazil, Korea, Taiwan, Indonesia and other markets go through their own period of turmoil/challenges, India should stand out for its depth, width and relative stability. Ultimately, earnings growth and valuations will be the key determinants for foreign investor interest returning.

Do you expect a reversal in the global AI trade in the near term? The signs of excess and stress in pockets seem to be there. Recent indicators from the fixed income markets in the US should not be ignored. Select stocks globally that have been the proxies for AI are also significantly off their recent highs (30-50 percent lower in many cases). It is also a fact that calendar year to date, foreign investors have pulled out more than US$140 billion from the Korean markets which is around 4x of India in the same time frame.

While impossible to predict, it is possible that Anthropic’s IPO announcement and possible listing marks some kind of a peak for the “AI trade” at least for the medium term. Is there a risk of further escalation in West Asia tensions, potentially pushing crude oil prices towards $150 a barrel? Tensions are already high and as events have shown even the “ceasefire” announced a few months back has not held out.

While attempts at bringing about some kind of a lasting ceasefire/ peace are being made, it remains to be seen how successful these are. Supply chain disruptions and high oil prices are a natural outcome and this impacts India disproportionately. India’s current crude basket is already being imported at around US$120 a barrel. Further spikes will adversely affect the macro picture in the near term and will indeed have effects on the financial markets.

Do you expect markets to remain range-bound until there is a resolution to, or signs of de-escalation in, West Asia tensions, alongside a sustained improvement in corporate earnings growth? Headline indices are not providing an accurate reflection of the underlying opportunity sets. While indices may be rangebound - if there is a de-escalation of tensions in West Asia, India can end up doing well - as we saw between April and August earlier this year.

Results are largely in line with expectations. Investors are looking for growth in both the topline and profitability. Businesses that can deliver sustainable and visible growth in both areas going forward will attract strong investor interest. Which sectors look attractive for portfolio allocation in the current market environment, given the prevailing global uncertainties? There are pockets of opportunities.

Financials, select consumer names, select names across the pharma pocket and names across the digital space which have delivered solid results and can grow profitably should do well. Are you bullish on the long-term investment opportunities in electrification and rare earths? “Electrification" has been a theme that has seen wide investor interest. This is being expressed through different companies across the value chain.

Ultimately, the underlying quality of the business, its earnings growth and most importantly its valuations relative to growth will be key drivers for delivering shareholder returns. There are limited opportunities in the listed space for companies tied to the rare earth minerals opportunity. It is also important to bear in mind that simply because a “theme” and/or narrative gains traction, it will not lead to ideal investable opportunities where there can be good shareholder returns over a period of time.

Do you expect the US midterm elections to trigger a significant shift in market sentiment globally? These events are well watched and can impact markets over the very near term. However, from an India standpoint investors are better served focussing on companies, their ability to be resilient and their being able to deliver growth and profitability.