Prashant Paroda sees AI stock rally cooling; bets on India’s secondary market

The global rally in artificial intelligence (AI) stocks, which has been the dominant market narrative this year, is now entering a 'digestion phase' as investors recalibrate their expectations, according to market commentator Prashant Paroda. He believes that while the AI theme remains potent, some of these stocks may have run up too far ahead of their fundamentals.

Speaking on the recent sell-off in US technology stocks, Paroda described the current environment as a period of adjustment. He linked the market's nervousness to broader economic concerns in the United States, which he characterised as a 'K-shaped economy'. While infrastructure spending on AI continues to be robust, he stated that job growth has not been strong over the last few months, a point underscored by recent data showing a surge in job cuts.

Paroda also pointed to the uncertainty around the US government shutdown, suggesting that a resolution could pave the way for a 'Santa rally' towards the end of the year as more reliable economic data becomes available.

In this global context, Paroda highlighted India as a compelling investment destination with a distinct advantage. He described India as an 'earnings growth story' that stands on its own merit, without needing an 'AI kicker'. He theorised that as global investors digest the AI trade and potentially look for alternative growth avenues, capital flows could find their way back to India. 'India could be the non-consensus AI when AI earnings sort of roll over trade,' he stated, suggesting that the country offers a solid fundamental play away from the crowded AI theme.

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Regarding investment strategy within India, Paroda expressed a clear preference for the secondary market over the bustling primary market. He acknowledged that the primary market remains strong, buoyed by domestic liquidity, but cautioned that valuations for many initial public offerings (IPOs) are high.

Paroda observed that the significant 'first day pop' that characterised IPOs in previous years has dissipated, leaving little value on the table for new investors. 'We've been very selective ourselves when looking at the primary market,' he said. Instead, he believes the secondary market still offers opportunities in companies that are growing their earnings at a decent clip.

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For the 'new age' technology companies that have recently listed, he advised a patient approach, suggesting investors should wait for them to 'digest to the public market' before considering them for investment over the next year.

For the entire interview, watch the accompanying video

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