'AI stocks may correct but 2000-style crash unlikely'

US smallcaps are a compelling value opportunity amid concerns about stretched valuations in artificial intelligence-linked stocks, says Vincent Nichols, investment specialist, US and thematic equity, at BNP Paribas Asset Management. The firm's GIFT City venture has launched the Baroda BNP Paribas GIFT US Small Cap Fund, a feeder fund. Nichols, in an interview with Samie Modak in ‘Mumbai, says US smallcaps — which have trailed largecaps through a prolonged earnings recession — are now seeing profits bottom out. Valuations are more attractive than those of largecaps. Edited excerpts:

- Vincent Nichols

The US market has been doing well, largely driven by big tech. Do you see this continuing, or do you think the market has entered an expensive territory?

There are two parts to that question. Regarding valuation, yes, by many metrics, the market looks rich. But that doesn’t mean underperformance is imminent. Valuation is a poor predictor of near-term returns. As long as mega-cap tech companies continue investing heavily in capex and AI infrastructure, I expect the momentum to continue. There could be short-term corrections technically but a bubble burst like in 2000 seems unlikely. These companies invest in Al because it’s existential to their businesses, not solely for attractive returns. I believe the strength in tech could last a couple more years.

Al has become a crowded trade globally. Is there still money flowing to this space?

While it is a crowded trade, ironically, we aren’t seeing much new money flowing into it recently. Many investors already have large positions in US tech, mostly via passive or active management. Even our team has not seen significant inflows. Globally, there’s been pessimism about the US investment story but the market has proven resilient.

You talked of the dotcom bubble. How is the scenario different now?