RBI flags risk as few AI-linked stocks drive bulk of Asian market gains

AI Stocks

• RBI warns Asian equity rally driven by few AI-linked tech stocks raises risk
• Major correction in US equities could trigger global market spillovers
• AI investments require huge capital, increasing debt financing in tech sector

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The Reserve Bank of India (RBI) has cautioned that the ongoing rally in Asian equity markets is increasingly being driven by a narrow set of large technology stocks linked to artificial intelligence (AI), raising the risk of spillovers from a potential correction in US equities, according to the Financial Stability Report.

“The optimism around AI is also evident in Asian indices with big technology stocks driving most of the gains,” report said.

The central bank noted that the phenomenon closely mirrors developments in the US equity market.

“A small number of stocks that are expected to benefit from AI now account for almost half of the returns in Hong Kong, South Korea and Taiwan, similar to the US,” the report said.

Data showed in the report show that Asian indices have delivered strong year-to-date performance, but the gains are unevenly distributed, with AI-linked stocks exerting an outsized influence on overall index returns. This rising concentration, the RBI warned, makes markets more vulnerable to sudden shifts in investor sentiment.

Highlighting the global implications, the RBI said, “a major correction in US equities could become a global systemic risk, dragging down these markets with implications for equities in the region.”

KOSPI has surged about 72.3 per cent YTD, making it the best performer among major Asian markets, while Hong Kong’s Hang Seng is up 27.4 per cent. Broader regional benchmarks have also posted solid gains, with the MSCI Asia-Pacific index rising 23.5 per cent, Taiwan’s TAIEX gaining 22.5 per cent, Japan’s TOPIX advancing 21.7 per cent, and China’s CSI 300 has lagged with a 14.8 per cent increase.

Data show that a very small number of stocks are contributing to 50 per cent of YTD index returns across key markets, reflecting a rising concentration risks.

In the US, just seven stocks account for half of the S&P 500’s returns, while six stocks do so in Hong Kong. The concentration is even more pronounced in some Asian markets, with only two stocks driving half of the returns in South Korea, and a single stock accounting for 50 per cent of the gains in Taiwan.

The report also said that another area of concern is the huge capital spending requirement to drive AI-related investments and their financing. So far, major firms have relied on their sizeable free cash flows to fund investments. However, with the spending on AI infrastructure estimated at trillions of dollars, debt financing has risen, and it is expected to increase substantially in the coming years.

Moreover, there are complex circular financing structures between these firms that are also driving the credit boom in the AI sector, report added.