Moneycontrol Pro Panorama | Quest for fair value gets tougher in the AI world

A massive rout in Nasdaq.

Dear Reader,

All it took was the launch of a new artificial intelligence (AI) tool by US-based Anthropic to trigger a massive rout in Nasdaq on Wednesday that saw a humungous $300 billion sell-off. Are market jitters contagious? Well, Wednesday’s Nasdaq rout led to weakness in global markets, too.  

The new tool has stoked fears of disruption across existing software services and also across other industries. But AI biggies too lost ground as competition is seen to rise and raise existential issues for companies in a rapidly changing world of technology. Such questions caused a $830 billion erosion in market value of US software stocks in the last week. As industry veterans put it, while AI is the driving force in IT innovation, spends and future income, the days of all and sundry benefiting is behind.

But this kind of market rout is not new to investors. The present surge and rout in indices mirror the extreme valuations during the dot-com boom that finally ended in a prolonged bust, with Nasdaq seeing no respite and recovery for about three years.

Take the Indian equity markets which have been volatile but range-bound for nearly a year. The Nifty 50 trades at 21 times one-year forward price-to-earnings multiple (PE) that is a tad higher than the long-term average of 19 times. Is this a fair valuation? The truth is that no one is sure what fair valuations are in a rapidly changing, new-age economy.

Complicating the valuation game are the changing company narratives. AI was purported to lead to higher automation, efficiency and better service and integrate IT services in its work flow. This raised hopes of earnings ramp-up and valuations. But in less than a year, the market is pricing in a threat to margins and order flows of legacy platforms triggering a valuation conundrum for investors and a market crash!

On this topic, today’s FT article, Not just a tech sell-off, brings interesting insights for investors. It highlights a reversal in factors that drive returns in the stock markets. “Stocks with high dividend yields, low valuations and high return on equity did well,” it said, adding “while momentum, high volatility and growth all got smacked down”.

So, is growth and momentum investing being pushed aside and replaced by search for value stocks? Again, one can draw a parallel with the dotcom crash when growth which was crushing value until the latter half of 1999 started to stutter in 2000, after which markets tanked. Not very different is the change in valuations of Indian auto stocks, especially two-wheelers. The threat from new-age electric vehicle firms funded by private equity capital at sky high valuations took the charm off the old world stocks in the segment. But this was short-lived. The legacy players mastered the game sooner than later, reinstating value in those stocks.

So, as long as there are such high levels of uncertainty, investors would be better-off bracing for volatility and sharp corrections in the market.

Investing insights from our research team

Tata Power: Will Mundra resolution unlock the next leg of rerating?

Solar Industries: Defence, global expansion power growth

Canara Robeco AMC’s valuation comfort outweighs lacklustre quarterly show

Trent: Will Q3 FY26 numbers drive re-rating?

What else are we reading?

Chart of the Day | Legacy automakers’ market share in electric two-wheelers surges

Why investors must keep an eye on Bajaj Finance’s asset quality, post Q3

KEC International: Robust order flows, but weak execution weighs down margins

For UPL, gains from US trade deal can go beyond near-term sales recovery

It’s not just a tech sell-off (republished from the FT)

Where is AI showing up in the productivity data? (republished from the FT)

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Vatsala KamatMoneycontrol Pro