The global artificial intelligence (AI) investment boom may be approaching a critical turning point, with the benefits of massive data-centre spending beginning to fade and risks of a slowdown in AI capex increasing, according to a strategy report by Nuvama Institutional Equities.
The report, authored by Prateek Parekh and Priyanka Shah and titled “Big alpha now lies in contrarian flip”, highlighted that investors may be extrapolating the recent AI-led cyclical earnings recovery into a longer-term structural trend. Nuvama believes the risk-reward is increasingly favouring a contrarian approach.
AI capex no longer lifting risk assets
One of the key observations in the September 4 report is that rising AI spending by hyperscalers is no longer translating into the same momentum across risk assets.
The AI capex boom is no longer reflating risk assets, Nuvama said, pointing to the divergence between continued increases in hyperscaler capex estimates and the performance of semiconductor stocks and industrial metals.
According to the report, even if current AI capex estimates are maintained, the growth impulse from AI spending has already peaked. Nuvama describes this as the “second derivative” rolling over, which could mean weaker downstream benefits for global markets and economies.
The report identifies three possible scenarios for AI capex. Its base case is that current consensus spending estimates hold, but with a declining growth impulse. The second, more bearish scenario is an AI capex slump, while the third is another acceleration in spending, which Nuvama considers relatively low probability given the current macro environment.
Hyperscalers face rising pressure
Nuvama highlighted three emerging risks to the AI investment cycle: higher chip costs, increasing Chinese competition and deteriorating cash flows at hyperscalers.
The report noted that hyperscalers are increasingly relying on debt issuance to fund capital expenditure amid higher interest rates. It also compares the recent stagnation in hardware technology stocks after their sharp rally with the late-cycle dynamics seen around 2000.
“The current stagnation in hardware tech stocks after the meltup is a classic late cycle sign, a la 2000,” the report said.
India has benefited from AI indirectly
Despite India having relatively limited direct exposure to the AI capex boom, Nuvama said the country has benefited significantly through indirect channels.
The report identified machinery exports, metal prices and rupee depreciation as three major spillover channels. Demand for power equipment such as transformers, along with cables and wires, has benefited from the global data-centre buildout. At the same time, capital flows associated with the AI boom have contributed to currency depreciation, while stronger metal prices have supported nominal revenues.
Nuvama estimated that nearly two-thirds of BSE500 top-line growth is directly or indirectly linked to global trade and prices, making Indian corporate earnings sensitive to developments in the global AI investment cycle.
Indian IT: From AI disruption risk to application opportunity?
Interestingly, Nuvama’s view is more constructive on Indian IT than the market’s current “anti-AI” narrative suggests.
The report further added that once AI moves from the infrastructure and investment phase into the application phase, Indian IT companies could benefit from both AI deployment and productivity gains.
When AI moves to application phase, Indian IT [will] benefit from productivity as well as its deployment,” Nuvama said.
This forms an important part of the report’s contrarian investment thesis. Nuvama says Indian IT has been assigned an “anti-AI valuation discount” because of concerns that AI could disrupt traditional technology services. However, it believes this discount may have become excessive.
Nuvama favours IT over AI-sensitive cyclicals
Against this backdrop, Nuvama recommends shifting towards large caps and defensive sectors, with IT among its preferred segments. It also favours private banks, pharma, selected consumer companies, chemicals, cement and internet businesses.
The brokerage specifically highlights IT’s valuation and dividend support, noting a 5% dividend yield while expecting the sector to benefit from the eventual shift towards AI applications.
The broader message is that the market may be nearing another investment-cycle flip. Nuvama believes that if AI capex growth continues to decelerate, the indirect boost to Indian cyclicals through exports, currency and commodity prices could weaken, making the currently expensive cyclical trade increasingly vulnerable.
For investors, therefore, the AI story may not simply be about who spends the most on AI infrastructure. The next phase could increasingly be about who actually deploys AI and captures productivity gains–a shift that Nuvama believes could put domestic IT back on the radar.
