AI rally cracks: Why Asian markets are crashing while Indian IT stocks bounce back

Asian chip stocks slumped after reports stoked fears of excess AI computing capacity. Indian IT shares, more tied to software spending, rose as investors weighed a different AI demand story.

In Short

• AI trade in South Korea and Taiwan shows fatigue with heavy selling
• KOSPI fell nearly 8%, Taiwan also dropped on AI investment concerns
• US Fed rate expectations and jobs data impact global AI stock trends

The artificial intelligence (AI) trade that fuelled record-breaking rallies across Asian stock markets is suddenly showing signs of fatigue.

Shares in South Korea and Taiwan, two of the world's biggest semiconductor hubs, came under heavy selling pressure on Thursday as investors questioned whether the massive spending on AI infrastructure had gone too far.

South Korea's benchmark KOSPI plunged nearly 8% and Taiwan slipped as investors questioned whether the AI investment boom has run too far, too fast.

In contrast, Indian technology stocks staged a strong comeback, with the Nifty IT index surging as much as 4.6% to 26,946.35 after falling 6.5% over the previous four sessions to its lowest level in more than five years.

The rebound was led by Infosys, which jumped over 5%, while TCS and HCLTech gained more than 4% each. Tech Mahindra also climbed nearly 4%, making IT the best-performing sector on Dalal Street.

The sharp divergence highlights how investors are now distinguishing between companies building AI infrastructure and those benefiting from AI adoption.

AI INFRASTRUCTURE TRADE UNRAVELS

According to Reuters, AI-heavy markets in South Korea and Taiwan came under intense pressure after concerns emerged over possible overcapacity in AI infrastructure.

South Korea's KOSPI, home to some of the world's biggest AI hardware suppliers, fell as much as 8%, its worst single-day decline since June 23. Chipmakers Samsung Electronics tumbled over 9%, while SK Hynix plunged nearly 15%.

Taiwan's benchmark index also dropped, dragged lower by Taiwan Semiconductor Manufacturing Company (TSMC), the world's largest contract chipmaker.

The trigger came after reports suggested Meta Platforms plans to commercialise its excess AI computing capacity by selling access to AI infrastructure and models. Investors interpreted the move as a signal that some technology companies may have built more AI computing capacity than required.

Adding to concerns were reports that Apple is considering sourcing memory chips from two Chinese semiconductor manufacturers, raising fears that South Korean giants Samsung Electronics and SK Hynix could face increasing competition.

Bloomberg also reported that the selloff reflected growing worries that valuations of AI-related semiconductor companies had run ahead of fundamentals after an extraordinary rally over the past year.

WHY INDIA'S IT COMPANIES ROSE

While AI hardware companies were being sold globally, Indian software exporters moved in the opposite direction.

The reason lies in their business model.

Unlike South Korean and Taiwanese companies that manufacture AI chips and memory components, Indian IT firms generate most of their revenue by providing software development, cloud migration, digital transformation, consulting and AI implementation services.

As enterprises continue adopting artificial intelligence, Indian IT companies are expected to benefit from helping businesses integrate AI into their existing systems rather than manufacturing the underlying hardware.

Investors increasingly view firms such as Infosys, TCS, HCLTech and Tech Mahindra as beneficiaries of enterprise AI spending without being exposed to the capital-intensive risks of semiconductor manufacturing.

FED EXPECTATIONS ALSO HELP

Another factor supporting Indian IT stocks was expectations surrounding the US Federal Reserve.

The Nifty IT index had dropped 6.5% over the previous four sessions after investors worried that the Fed could raise interest rates later this year, hurting technology spending in the US — the biggest market for Indian software exporters.

Higher US interest rates generally slow economic activity and make companies more cautious about discretionary spending, including large technology transformation projects. Since a significant share of Indian IT companies' revenue comes from North America, expectations of tighter monetary policy often weigh on their earnings outlook.

However, after the recent correction, investors appeared to view the selloff as excessive, leading to bargain buying in frontline IT names.

Markets are also awaiting the US non-farm payrolls data, which could provide fresh clues on the Federal Reserve's interest-rate path.

AI TRADE UNDER PRESSURE

Bloomberg reported that the latest decline has reignited concerns about whether the spectacular AI rally can continue at the same pace after semiconductor stocks delivered outsized gains over the past year.

South Korea remains among the world's best-performing equity markets this year despite the correction, having risen sharply on the back of AI-linked semiconductor companies before this week's selloff.

Analysts, however, caution that while sentiment has weakened, the long-term demand for AI hardware remains intact.

Reuters quoted Pepperstone research strategist Dilin Wu as saying, "Directionally, I think the selloff is overdone. The structural demand case for AI hardware doesn't change in a single day. But the market needs earnings season to rebuild conviction; TSMC's July 16 results are the nearest test."

WHAT INVESTORS SHOULD WATCH

For Indian investors, Thursday's trading reinforced an important distinction emerging in global markets.

Companies supplying AI infrastructure, especially semiconductor manufacturers, are facing valuation concerns after a prolonged rally. At the same time, software and services companies that help enterprises deploy AI are attracting fresh buying as investors see them benefiting from the next phase of AI adoption without bearing the enormous costs of building AI infrastructure.

The next major triggers for global technology stocks will be US jobs data, further guidance from the Federal Reserve on interest rates, corporate earnings and management commentary on AI spending trends, which will determine whether the current correction in AI-linked hardware stocks deepens or stabilises.

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