BT Explainer: Why stock markets are falling; behind AI rout & likely impact on India

Korea’s Kospi on Friday hit its circuit breaker, while indices across Japan and Taiwan were hit hard following a Wall Street rout overnight that sent the Nasdaq 100 falling 6.4 per cent. The selloff was largely triggered by artificial intelligence (AI)-related stocks, amid growing fears of a moratorium on new AI and technology data centres following Democratic gains over US President Donald Trump-led Republicans in the midterm elections.

Such concerns could give a boost to the 'reverse AI' trade and help markets like India outperform, although near-term weakness cannot be ruled out.

Analysts said concerns about tighter AI-related regulation and excessive competition with China continue to linger. They added that a risk-on environment would likely require the Federal Reserve to pause rate hikes, a ceasefire to drive down oil prices and a recovery in technology stocks.

Korea's Kospi fell as much as 8.8 per cent today, triggering circuit breaker, with Samsung and SK Hynix falling over 6 per cent each. Japan's Nikkei declined 5.7 per cent. This is after a 6.4 per cent overnight drop in Nasdaq 100 that wiped $2.3 trillion in value in a worst trading session since March 2020.

High interest rates, elevated oil prices and mixed Q3 results from US AI companies have weighed on global equities, with investors now questioning whether massive AI investment commitments will generate adequate returns, even if concerns regarding moratorium is exaggerated.

As Nomura pointed out this morning, a federal AI data centre (AIDC) moratorium is unlikely, but a "temporary pause" at the state level remains possible.

It said mainstream Democrats are not opposed to AI itself. The key questions are who pays for power, who provides oversight, how semiconductor chips are supplied to China, and how export controls on chipmaking equipment would evolve.

"A federal data centre moratorium looks unlikely given divisions within the party and the presidential veto, and any brakes should come at the state level. In Texas and Georgia, candidates who campaigned on a 'temporary pause' (halting new permits for AI data centres until rules are in place) won, while in Ohio both parties' candidates backed conditional approval," Nomura said.

No governor-elect in major data centre states has pledged a permanent ban; permanent bans exist only in some local ballot measures, it noted.

For India, the immediate pressure is likely to be concentrated in IT and other globally sensitive stocks, but sustained global deleveraging could eventually affect domestic sectors through foreign selling even without a direct earnings impact, said Hariselvan Radhakrishnan, Founder & CEO of HST Wealth.

Data showed Gift Nifty was quoting at 22,442 today, down 175 points or 0.71 per cent, far better than the selloff in Asian equities.

"India may initially demonstrate relative resilience amid the global market correction, although this should not be mistaken for immunity to broader risk aversion. Stable crude oil prices, contained FII selling and Bank Nifty sustaining its recent breakout could help limit downside pressure on domestic equities. However, a broader wave of foreign institutional liquidation or a decisive breach of the 24,330 level would signal that global risk aversion is increasingly outweighing domestic market supports," Radhakrishnan said.