Shock absorbers in the midst of AI panic! The Indian stock market in 2026 may become an important tool to hedge against the risk of an AI bubble.

Global large asset management institutions are now considering the Indian stock market as the preferred target for hedging against the risk of AI bubble burst. With the recent significant decline in stock prices of tech giants such as Oracle, Nvidia, and Broadcom, who have benefited from the AI boom in recent years, the market's concern about the bursting of the AI bubble has significantly increased. There is fear of a "tech stock bear market crash trajectory comparable to the dot-com bubble burst in 2000." The Indian market is gaining increased attention from global hedge fund managers, who hope to diversify stock investment risks next year. European asset management giant Aberdeen Group Plc believes that Indian stocks will rebound next year. Additionally, two other asset management giants, Principal Asset Management Co. and Eastspring Investments, believe that the Indian market has low relevance to the "AI narrative" trading and can serve as an important tool to hedge against other stock markets (especially tech-heavy markets like the US, South Korea, and China-Taiwan). Senior strategists from HSBC and Jefferies Financial Group Inc. have also expressed similar views. As the hype around AI investments cools down and the overall valuation of the Indian stock market has lagged behind the MSCI global benchmark indices and MSCI Asia-Pacific benchmark indices this year, it has now fallen back to near the five-year average. This consumption-driven economy is attracting favor from Wall Street and European asset management giants. Unlike the US stock market dominated by tech stocks benefiting from AI such as the "Magnificent Seven," the Indian stock market's gains are primarily driven by banks, consumer companies, and the service sector. This provides investors with a path to reduce exposure to AI risks avoiding tying investment returns too heavily to a small group of AI winners. Top Wall Street institutions are increasingly skeptical about the sustainability of the unprecedented global AI investment frenzy led by the "Magnificent Seven" tech giants in the US. They believe that a so-called "AI bubble" with firepower comparable to the "dot-com bubble" in the past is forming. More importantly, these top institutions are beginning to bet on "which significant events/moments may burst the bubble completely." This skepticism towards the AI narrative finally led to a collective plunge in the stock prices of popular tech stocks such as Oracle, Nvidia, and Broadcom since the end of 2022. Sameer Bhasin, investment head at Value Point Capital, pointed out that stocks benefiting from the AI boom often do not undergo significant adjustments due to a decline in growth rates but only show more pronounced retreats once the growth rate no longer accelerates. Therefore, the market is starting to suspect that this irrational bubble is forming and is on the verge of a severe burst. Several Wall Street giants, including Goldman Sachs, Bank of America, Yardeni Research, and Morgan Stanley, have recently stated in their annual summaries and outlooks that there is growing skepticism in the market about the high valuations of tech stocks and the substantial AI investments' ability to generate significant returns. This has led the market to focus more on traditional cyclical sectors such as industrials and energy, rather than on highly valued and at the center of the "AI bubble" tech giants like Nvidia and Amazon. Ed Yardeni, founder of Yardeni Research, even suggested for the first time since 2010 that investors "reduce" the seven major tech giants relative to the rest of the S&P 500 index. Global funds are beginning to view the Indian stock market as a hedge tool against AI risks. "India can be a good diversification and asset allocation in portfolios by 2026 as it has low correlation with other major markets leaning towards AI, and once the AI trading frenzy stops, funds will flow massively into India," said Raj Singh, Multi-Asset Manager at Principal AMC. He added that India has a very strong domestic growth story and is benefiting from tax cuts, labor law reforms, domestic liquidity expansion, supportive fiscal policies, and stable corporate profits. Jefferies, a Wall Street giant, believes that if the global AI investment theme peaks and declines, the Indian stock market will significantly outperform markets with high AI risks. They are bullish on targets such as Axis Bank Ltd., Bharti Airtel Ltd., and TVS Motor Co. Ltd. Global tech giants Amazon.com Inc. and Microsoft Corp. have pledged to invest a total of $52 billion in the Indian market over the next few years, with a large portion going towards AI infrastructure development. However, India does not have significant "pure AI investment targets" like the US chip giant Nvidia and lacks substantial exposure in chip design, manufacturing, and device ecosystem. Early AI expansion initiatives by Tata Consultancy Services Ltd. have only sparked relatively flat investor interest. On the other hand, hedge funds are collectively focusing on Indian domestic power equipment manufacturers and data center operators associated with data center construction, which will benefit from the comprehensive establishment of India's domestic AI ecosystem. These companies have much cheaper valuations compared to power stocks near historical highs in the US, benefiting both from the flow of global funds back to India in the AI bubble panic period and from the valuation expansion brought by Amazon and Microsoft's AI data center investments. Christina Woon, portfolio manager at Eastspring Investments, said, "At this delicate moment, the Indian market is a good diversification asset." She emphasized that investors can leverage growth factors in the Indian domestic market, and compared to many stock markets, the earnings expectations and valuation indicators of the Indian market are still more reasonable. Other local factors are also providing a strong background for the Indian stock market: the central bank has significantly lowered the benchmark interest rates, the Indian economy grew by a significant 8.2% in the latest quarter, and a trade agreement with the US to substantially reduce tariffs may be signed soon. Jerry Goh, Asian Stock Investment Director at Aberdeen, said, "After a relatively flat 2025, the Indian stock market may bring significant surprises next year." He added that they are actively positioning in areas that appear more attractively valued.