(Bloomberg) – Emerging market funds are pivoting to capture the artificial intelligence epidemic, with some investors predicting booming technology spending will drive returns for years to come.
Encouraged by the success of Chinese AI developer Deepseek and the Asian powerhouse semiconductor company, asset managers such as Allspring Global Investments and GIB Asset Management have concentrated their portfolios on AI stocks. This is a winning trade, and the AI company is the six biggest contributors of Rally's EM stock index this year.
“This trend could continue for the next 10-20 years,” said Alison Shimada, head of Allspring's Total Emerging Markets Equity. “The impact on local groups within EM is transformative.”
Many of AI investments Frenzy focus on a small number of Silicon Valley companies, but benefit from EM companies that can leverage technology and supply critical components. For example, AI servers have become the major growth driver for Taiwan's Hon Hai Precision Industry Co., known as Foxconn.
The biggest contributors to Bloomberg's EM Stock Index this year are Taiwan Semiconductor Manufacturing Co., Tencent Holdings Ltd., Alibaba Group Holding Ltd., Samsung Electronics Co., SK Hynix Inc. and Xiaomi Corporation, which consider the Index's Rally 37%.
According to an equity strategist at Citigroup Inc., the AI-rated emerging market stocks outperformed the so-called seven megacup technology companies this year.
Kunal Desai, co-portfolio manager for global emerging market equities in GIB Asset Management, said:
Desai said Taiwan and South Korea will be “central drivers” of EM market stories for the next two to three years, with Malaysia, China, India, parts of Latin America and parts of the Middle East looking at “disproportionate benefits” from exposure to AI data and applications. His fund has invested in AI stocks during the recent market decline, and predicts that a third of emerging market returns will come from AI-related stocks in the coming years.
There are signs that momentum continues as AI adoption accelerates across segments such as cloud computing and electric vehicles. The average 12-month earnings estimate for EM Tech stocks has increased by 15% since the start of the year, compared to 6% of all EM stocks.
“The percentage of AI contributions from a performance perspective only grows from this,” says Xingchen Yu, emerging market strategist at UBS Global Wealth Management. “The rise of AI and technology is creating a new layer of secular growth, especially in North Asia.”
The AI revolution could help overcome earnings performance, which is a key obstacle for EM stocks. The company's results have been forecast quarterly forecasts since early 2022, with MSCI EM index companies missing revenue expectations by more than 12%, according to data compiled by Bloomberg.
However, companies in the AI-heavy information technology sector have consistently met their revenue forecasts since last quarter, increasing investors' confidence.
“The sector is expected to grow explosively and will continue to do so in the future,” said Young Jae Lee, senior investment manager at Pictet Asset Management Ltd.
– Support from Jorgelina de Rosario.
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