India's Cyclical Recovery at Risk from Oil Shock, Slowing AI Investment
India's cyclical recovery is facing risks from an oil supply shock, fading domestic stimulus, and weaker artificial intelligence (AI) capital expenditure, according to a report by Nuvama Institutional Equities. The impact of the oil supply shock on corporate margins is expected to emerge in Q2FY27, following a similar lag observed during the 2022 war when small- and mid-cap companies and cyclical sectors suffered a larger hit to profits.
Inventory gains, which prevented margin contraction in Q1FY27, will reverse from Q2FY27. Meanwhile, AI investment is no longer giving a strong boost to financial markets, possibly because the growth in AI-related spending is slowing. If this trend continues, 'the positive impact of AI investment on exports and metal prices could weaken from the second half of FY27.'
The report also flagged growing concerns that AI investment could slow further due to rising chip costs, stronger competition from China, and weaker cash flows forcing technology companies to rely more on debt to fund their investments. The recent slowdown in hardware technology stocks after a sharp rise could be an early warning sign, similar to what happened before the dot-com bubble burst in 2000.
A hawkish Federal Reserve and rising global bond yields could add to the pressure on risk assets. Bond yields across the US, Europe, UK, and Japan have risen sharply even after adjusting for inflation. The report attributed the increase not only to tighter central bank policies but also to changes in the way US dollars are being recycled globally.