The stock market legend Howard Marks famously said: “Cycles are inevitable, and understanding and mastering them is of great importance.” He went on to add that “success carries within itself the seeds of failure, and failure the seeds of success.” This means, cycles are self-correcting. But it would be extremely difficult, almost impossible, to predict when the cycle will turn. Therefore, investors should refrain from trying to look at any crystal ball to see when the cycle will turn. Instead, they should prepare for the eventual end of the cycle and focus on building portfolios which will deliver, when the cycle inevitably ends.
We are presently in the midst of a super cycle in AI stocks, particularly in stocks of companies that manufacture semiconductor chips. Stocks of South Korean giants like Samsung and SK Hynix, and Taiwan’s TSMC are on fire, pushing the South Korean and Taiwanese stock benchmark indices to incredible record highs. As I write on 21st June, the South Korean index KOSPI is up 110 percent YTD and 200 percent during the last one-year. The Taiwanese index TAIEX is up 58 percent YTD and 100 percent during the last one-year. These are rare exceptional returns and are unlikely to sustain. But it is difficult to predict when the cycle will turn. Samsung and SK Hynix now account for 52 percent of KOSPI and TSMC is now 42 percent of TAIEX. These are unprecedented, concentrated massive bull runs driven by a few stocks. It is evident that there is huge concentration risk in this narrow trade. However, the humungous profitability of these semiconductor giants and their reasonable valuations despite the huge runup, may sustain the rally for some more time.
Since we can’t predict when this rally will end, let us prepare for the eventual end of the rally. In India, we don’t have companies in this segment of the AI trade. This has impacted Indian markets. FPIs have been selling relentlessly in India and moving money to the AI trade. In 2025 FPIs sold $19 billion in India and this year till June 20th they have sold equity for a massive $26 billion. This unprecedented heavy selling has been a principal factor weighing on Indian markets since September 2024 when the market started trending down. Also, valuations in India, particularly in the broader market, have remained high. Sustained DII buying absorbing the FPI selling has imparted resilience to the market.
There are some positive developments in the economy and markets which investors should keep in mind. Corporate earnings have rebounded impressively in FY26 with Nifty 500 reporting 15.6 percent earnings growth. Mid-caps have performed exceedingly well followed by small-caps. On the back of this impressive growth, FY27 earnings can grow at about 12 percent. This will make large-cap valuations fair and the broader market valuations a bit elevated. However, it can be argued that elevated valuations of the mid and small-caps can be partly justified by their superior earnings growth potential.
The crash in Brent crude to below $80 and the initiatives by the government and the RBI to attract capital flows into India have by and large solved the problem of financing the BoP deficit. India’s growth and earnings prospects look good. A strong sustained rally in the Indian market might take time; meanwhile investors should remain invested and continue with the strategy of systematic investment.
