AI-tech ghosts of Friday the 13

Some media reports talk about the spirits and ghosts of Friday the 13 that loom over the Indian stock markets. Others talk about the spread of the AI-tech plague that decimated the software stocks. A few mention that it is the Bengaluru contagion that will soon spread to other IT centres in the country. The fact remains that over the past few trading sessions, and especially yesterday, stock indices took a tumble, software shares crumbled like dry cookies, and other sectors were caught in the AI (Artificial Intelligence) whirlwind. No one knows when and where this will stop. At present, it seems like a bottomless snake pit.

Let us start with the benchmark indices, the Sensex (Bombay Stock Exchange) and Nifty (National Stock Exchange), which plummeted by more than one per cent yesterday. The big fall wiped out more than Rs 4,50,000 crore in a jiffy. This followed a steep fall on Wall Street, and a two per cent dip in Nasdaq. “Asian markets followed Wall Street… retreating from recent record highs…,” states a media report. Experts cite several reasons for the Indian slump, which includes a stronger dollar, weaker rupee, geopolitical tensions, and technical factors. But these are reasons that have prevailed in the past 12 months.

Of course, the overriding and overwhelming factor is AI, and tech-related reasons, which has spread to Indian IT. Yesterday, the so-called heavyweights like Infosys, TCS, HCL tech, and Wipro “emerged as key laggards.” Most of them dropped by 4-6 per cent in a day. The Nifty IT index was tossed down by more than four per cent, which extended its two-day fall to nearly 10 per cent. The shares of TCS “plunged” to a five-and-a-half-year low to below `2,600. “With the latest fall, the (TCS) stock is now down 44 per cent from its all-time high of `4,592 hit in August 2024,” states a media report.

According to some estimates, the price of TCS is at its lowest level since September 22, 2020, when it closed at `2,523. This is why SBI overtook the IT bellwether company to become the fourth-largest listed stock by market cap. The latest wave of selling in the Indian markets came after the overnight plunge of up to 10 per cent in Infosys and Wipro American depository receipts in the US. Over the past few days, Nasdaq and American tech stocks were startled by a trigger-related realisation related to the “disruptive impact of AI on earnings visibility and sector margins.” Most tech stocks have trembled.

According to an analyst quoted in a media report, “Tech stocks foreign ones, including Indian software firms … are unlikely to recover soon.” He adds that Indian IT faces pressures in the near-term, “while a rotation of capital towards stronger-performing sectors could support stocks outside the technology space.” In effect, investors may shift from tech and software to other industries, where the returns seem more lucrative, leaving the TCS, Infosys, HCL, and Wipro in a lurch. The rerating that analysts expected in tech stocks this year may be a thing of the past, at least for now, and over the next few months.

The immediate jolt to the tech stocks in the US came when the AI start-up, Anthropic, “unveiled a new tool tailored for corporate legal teams.” The maker of Claude chatbot stated that it could automate several legal tasks such as “contract reviews, non-disclosure agreement triage, compliance workflows, legal brief preparation, and standardised responses.” Investors suddenly woke up to the growing concern that AI can fundamentally reshape the landscape for software and IT. It can disrupt not just profits and revenues, but the existing business models based on extensive and expansive processes and systems.

For two decades, after the Internet collapse at the end of the last century, Indian IT firms have shored up the offshore model based on a simple principle. Indian campuses, with minimal onshore exposure at the clients’ end, have evolved scalable systems that can take care of most processes, especially legal services, data analytics, and customer support, in an efficient and cheapest manner. If these can be disrupted by AI, most of the revenues of Indian firms will vanish, and quite quickly. The existing models are jeopardised. New models need to crop up, which may imply many failures, and some successes.

Global brokerage firm, JP Morgan, still seems gung-ho. It reminded the panic-stricken investors that IT services firms are the indispensable ‘plumbers of the developed world,’ and their dividend yields have hit levels that were last witnessed during the Great Recession of 2008, and pandemic period. It talks about a “barbell approach to buy deep value in large caps,” with overweight ratings on Infosys and Wipro. Although JP Morgan suggests limited downside in the future, it states that any marginal recovery (or Claude-like trigger) can drive significant upside. So, the dangers are low now, and gains are quite high.

What is most intriguing in this game of ‘Game of Thrones,’ with continuous and consistent changes on how grabs the seat, is the Bengaluru impact. Yesterday, even as the shares of Indian IT plummeted, those of realtors exposed to the Bengaluru city followed suit. Some like Prestige Estate, and Oberoi Realty fell by four per cent, and the sectoral index was down two per cent. Investors felt that if software was in trouble, so was real estate focused on the city, which supplies space and campuses to the IT firms. IT drives the property demand, and a slump hurts real estate sales and prices.

According to a media report, “Commercial real estate has already been under strain from elevated interest rates, and the structural shift towards remote and hybrid work models following the pandemic, which can dent office space demand. Adding to the uncertainty fears of slower hiring, workforce rationalisation, and automation-driven efficiencies in technology companies have raised red flags over future residential demand, especially in mid-to-premium housing segments where IT professionals account for a significant share of buyers.” Thus, the IT plague will impact commercial and residential spaces.

Last week, another global brokerage house categorically noted that the sentiment and scenario have changed from the feeling that ‘AI helps these (tech and software) companies’ to ‘AI replaces these companies.’ The current wave of trading, or deep selling, is about “get me out” of these stocks, and as fast as you can. This implies that the investors have decided to get out at any cost, whatever may be the price.