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What is the story about?
India currently lacks a strong catalyst to bring foreign institutional investors (FIIs) back in a meaningful way, says Adrian Mowat, Investor at Hong Kong SAR. While investors can selectively accumulate quality companies trading below their long-term valuations, a sustained revival in FII interest will likely depend on better earnings revisions, lower oil prices and Indian IT firms proving they can use AI to create value for clients.
Globally, Mowat believes the AI investment cycle is entering its next phase after a rally led by hyperscalers, AI infrastructure and semiconductor stocks. The focus is now shifting to monetisation, with companies that can use AI to increase revenues or reduce costs expected to emerge as the next winners, while customised and open-source AI models evolve over the coming years.
This is an edited transcript of the interview.Q: What's your view on what's happening with AI stocks? Are you sensing some fatigue, with investors looking beyond the few AI names? What's the investment call you're taking?
A: Look, I think the AI story has been quite logical in terms of the way the markets have played out. Initially, you had the Magnificent Seven performing well. The hyperscalers were the big story, as were companies with indirect exposure to large language model developers, such as Microsoft through its stake in OpenAI.
It then moved to the companies providing the infrastructure, and particularly to the semiconductor space, which really has been the story of 2026, especially the memory manufacturers. It has also broadened companies like Intel. You've had stocks more than doubling, and in the case of Sandisk, up around six times.
When you look at the valuations of these stocks, most of them are on single-digit next year's multiples. Even Nvidia is on around 16 times. So, the earnings revisions have certainly justified these moves.
Now, after such large gains in semiconductors, it's understandable that we're seeing volatility and probably a consolidation phase. The market is questioning how long these very high margins in the semiconductor space can last. That all looks quite logical to me.
The next stage, as we look into 2027, is identifying which businesses will use AI to drive higher revenues and/or reduce costs. That is going to be the theme. It's going to be about monetisation. It's going to be about sustaining the AI story by proving there are broader benefits for companies. Whether that comes through customised large language models or a more open-source, large language model-agnostic approach will be determined over the next couple of years.
Q: The Magnificent Seven has underperformed materially this year. What's your sense?
A: As I was saying, I think it's all been quite logical. There is suspicion that the hyperscalers are spending too much money, along with questions over whether they'll generate adequate returns. That's evident in Microsoft's share price, which is down nearly 25% from its 52-week high.
It's even more extreme in China. Alibaba is almost half of its 52-week high, despite its cloud computing business doing extremely well. So, I think the market is quite cynical about certain parts of the AI trade. The story this year has really been driven by a very narrow theme—the semiconductor space.
Q: At some point, do you see the theme broadening out? Coming back to India, a couple of macro indicators have turned favourable. Corporate profits-to-GDP are at multi-year highs, while one-year forward valuations are about 10% below long-term averages. After India's underperformance, and Korea's recent underperformance, do you think the balance shifts towards India, especially if there's interest in emerging markets (EMs)?
A: There have been some pretty nasty bear markets across emerging markets, whether it's India, China, or even Manila, where I was yesterday, despite record valuations.
You had comments on the technical position in the Indian market, about consolidation setting up more constructive moves. I think that's what we should be looking for now.
At the moment, though, I'm struggling to see the sort of powerful catalyst that would make foreign institutional investors wake up and decide they need to allocate more money to India. Usually, that catalyst comes from earnings revisions, and those have still been relatively weak.
If we get better news on growth—perhaps oil prices turning favourable, easing pressure on the rupee and improving the purchasing power of Indian consumers—those are the kinds of things to watch.
For now, this is more time for doing your homework, identifying companies trading at attractive valuations relative to their long-term history, and patiently accumulating them rather than expecting strong market performance in the near term.
Q: So, India lacks a powerful catalyst that would make FIIs invest again. Does that mean India continues to underperform? And if you had $100 to invest in emerging markets, how much would you allocate to India?
A: As I said, I'd probably be looking to accumulate a few opportunities at the moment, but I would still be underweight India relative to the benchmark.
To me, the Indian IT companies will be the bellwethers. If they can prove they are using AI effectively and can create value for their customers, that would probably be a powerful signal. At the moment, though, the market remains very cynical about that.
Q: What about software companies? As the market works through the debate around large language models, does that reduce fears that these models will eventually kill the software industry? Could that be a marginal positive for software companies?
A: I think the key selling point these companies need to make is around security, cybersecurity and data protection.
I can think of many anecdotal examples of friends working at large corporations whose access to large language models is very restricted because companies are concerned about cybersecurity, confidential information leaking out and risks to their IT infrastructure.
To me, that's where Indian software companies should be focusing—giving companies reassurance and providing the controls around AI processes that give customers comfort. That's the angle I'd be pushing.
Q: So, you're saying that's the edge these companies have in this changing environment?
A: That's the edge they need to prove. It's not clear they have demonstrated that edge yet.
Q: But if security and trust are the edge, they already have that, don't they? They work with some of the world's largest Fortune 500 companies, have been deeply embedded with them for 20–25 years, both on-premises and offsite.
A: Look, I agree with that observation. It's interesting that it doesn't seem to be the message that's being communicated to the market clearly.
Watch the full conversation hereQ: Anything else that looks out of whack globally? A lot seems out of whack every day. Is there anything you're particularly watching?
A: I'm still anxious about what's happening in the Middle East.
The Strait of Hormuz is neither fully open nor fully closed, and there are already specific shortages of certain products around the world. We still need to be cautious about supply disruptions because inventory levels have been drawn down to critically low levels.
I don't feel the negotiations between the US and Iran are going smoothly, to say the least. So, let's remain a little cautious about that.
Catch all the latest updates from the stock market here
Globally, Mowat believes the AI investment cycle is entering its next phase after a rally led by hyperscalers, AI infrastructure and semiconductor stocks. The focus is now shifting to monetisation, with companies that can use AI to increase revenues or reduce costs expected to emerge as the next winners, while customised and open-source AI models evolve over the coming years.
This is an edited transcript of the interview.Q: What's your view on what's happening with AI stocks? Are you sensing some fatigue, with investors looking beyond the few AI names? What's the investment call you're taking?
A: Look, I think the AI story has been quite logical in terms of the way the markets have played out. Initially, you had the Magnificent Seven performing well. The hyperscalers were the big story, as were companies with indirect exposure to large language model developers, such as Microsoft through its stake in OpenAI.
It then moved to the companies providing the infrastructure, and particularly to the semiconductor space, which really has been the story of 2026, especially the memory manufacturers. It has also broadened companies like Intel. You've had stocks more than doubling, and in the case of Sandisk, up around six times.
When you look at the valuations of these stocks, most of them are on single-digit next year's multiples. Even Nvidia is on around 16 times. So, the earnings revisions have certainly justified these moves.
Now, after such large gains in semiconductors, it's understandable that we're seeing volatility and probably a consolidation phase. The market is questioning how long these very high margins in the semiconductor space can last. That all looks quite logical to me.
The next stage, as we look into 2027, is identifying which businesses will use AI to drive higher revenues and/or reduce costs. That is going to be the theme. It's going to be about monetisation. It's going to be about sustaining the AI story by proving there are broader benefits for companies. Whether that comes through customised large language models or a more open-source, large language model-agnostic approach will be determined over the next couple of years.
Q: The Magnificent Seven has underperformed materially this year. What's your sense?
A: As I was saying, I think it's all been quite logical. There is suspicion that the hyperscalers are spending too much money, along with questions over whether they'll generate adequate returns. That's evident in Microsoft's share price, which is down nearly 25% from its 52-week high.
It's even more extreme in China. Alibaba is almost half of its 52-week high, despite its cloud computing business doing extremely well. So, I think the market is quite cynical about certain parts of the AI trade. The story this year has really been driven by a very narrow theme—the semiconductor space.
Q: At some point, do you see the theme broadening out? Coming back to India, a couple of macro indicators have turned favourable. Corporate profits-to-GDP are at multi-year highs, while one-year forward valuations are about 10% below long-term averages. After India's underperformance, and Korea's recent underperformance, do you think the balance shifts towards India, especially if there's interest in emerging markets (EMs)?
A: There have been some pretty nasty bear markets across emerging markets, whether it's India, China, or even Manila, where I was yesterday, despite record valuations.
You had comments on the technical position in the Indian market, about consolidation setting up more constructive moves. I think that's what we should be looking for now.
At the moment, though, I'm struggling to see the sort of powerful catalyst that would make foreign institutional investors wake up and decide they need to allocate more money to India. Usually, that catalyst comes from earnings revisions, and those have still been relatively weak.
If we get better news on growth—perhaps oil prices turning favourable, easing pressure on the rupee and improving the purchasing power of Indian consumers—those are the kinds of things to watch.
For now, this is more time for doing your homework, identifying companies trading at attractive valuations relative to their long-term history, and patiently accumulating them rather than expecting strong market performance in the near term.
Q: So, India lacks a powerful catalyst that would make FIIs invest again. Does that mean India continues to underperform? And if you had $100 to invest in emerging markets, how much would you allocate to India?
A: As I said, I'd probably be looking to accumulate a few opportunities at the moment, but I would still be underweight India relative to the benchmark.
To me, the Indian IT companies will be the bellwethers. If they can prove they are using AI effectively and can create value for their customers, that would probably be a powerful signal. At the moment, though, the market remains very cynical about that.
Q: What about software companies? As the market works through the debate around large language models, does that reduce fears that these models will eventually kill the software industry? Could that be a marginal positive for software companies?
A: I think the key selling point these companies need to make is around security, cybersecurity and data protection.
I can think of many anecdotal examples of friends working at large corporations whose access to large language models is very restricted because companies are concerned about cybersecurity, confidential information leaking out and risks to their IT infrastructure.
To me, that's where Indian software companies should be focusing—giving companies reassurance and providing the controls around AI processes that give customers comfort. That's the angle I'd be pushing.
Q: So, you're saying that's the edge these companies have in this changing environment?
A: That's the edge they need to prove. It's not clear they have demonstrated that edge yet.
Q: But if security and trust are the edge, they already have that, don't they? They work with some of the world's largest Fortune 500 companies, have been deeply embedded with them for 20–25 years, both on-premises and offsite.
A: Look, I agree with that observation. It's interesting that it doesn't seem to be the message that's being communicated to the market clearly.
Watch the full conversation hereQ: Anything else that looks out of whack globally? A lot seems out of whack every day. Is there anything you're particularly watching?
A: I'm still anxious about what's happening in the Middle East.
The Strait of Hormuz is neither fully open nor fully closed, and there are already specific shortages of certain products around the world. We still need to be cautious about supply disruptions because inventory levels have been drawn down to critically low levels.
I don't feel the negotiations between the US and Iran are going smoothly, to say the least. So, let's remain a little cautious about that.
Catch all the latest updates from the stock market here
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