AI trade showing signs of overheating; India could gain as Wall Street rally pauses: Geoffrey Dennis

The powerful, technology-led rally on Wall Street may be due for a pause as concerns grow that the artificial intelligence (AI) trade is becoming overheated, said Geoffrey Dennis, Independent Emerging Market Commentator. He suggested that such a slowdown could prompt a rotation of capital into undervalued emerging markets, with India poised to be a major beneficiary.

Commenting on the recent market action, where stocks like AMD have seen double-digit gains following a series of partnership announcements, Dennis stated that there is a perception of circularity in the sector. "There is some suggestion that things are just indeed going round and round," he said, referring to the chain of deals between firms like OpenAI, AMD, Nvidia, and Microsoft. This has led to concerns about a potential bubble in AI and technology stocks, with Dennis stating, "We're set for a pause before too long."

However, he does not foresee a major crash similar to the dot-com bust of 2000, as the current technology giants have real businesses and are generating substantial revenues. Instead, he anticipates a period of consolidation and rotation into less popular sectors.

For emerging markets (EMs), Dennis emphasised that the primary driver for capital flows is the performance of the US dollar. "A lower dollar is what pushes investors towards riskier assets overseas, such as emerging [markets]," he explained. A pause or modest pullback in US equities, if it does not trigger a major sell-off, could be positive for EMs. If accompanied by a weaker dollar, it would create a key signal for investors to move capital overseas.

Also Read: Emerging markets set for stronger inflows as dollar weakens: BofA

Dennis identified India as a market with significant potential to attract these flows. He cited several favourable factors, including ample scope for lower interest rates, a reasonably well-performing economy, and its recent status as a "big underperformer," which suggests valuation comfort. Additionally, he stated that the initial stage-one agreement in the Israel-Gaza conflict, while tentative, could prove to be negative for oil prices, which would be another positive for the Indian economy.

"A pause in the US and a slight pullback in tech, as long as that's accompanied by a real key signal to move overseas, which would, I think, be a weaker dollar, India could well be a major beneficiary of that," Dennis concluded on the equity outlook.

Also Read: Gold is India’s true wealth multiplier, says Enam’s Sridhar Sivaram

On gold, Dennis expressed scepticism about the precious metal's ability to continue its strong rally. He believes gold is "well due a pause as well" and suggested that any de-escalation in the Middle East conflict could trigger a retreat from safe-haven assets. "That is going to be a development which leads to a little bit of a retreat from safe havens," he said, referring to the Hamas-Israel prisoner exchange deal. While acknowledging the agreement is only a first step, he sees it as a potential catalyst for notable profit-taking in gold.

For the entire interview, watch the accompanying video

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