“We view artificial intelligence (AI) as a catalyst for growth in developing economies,” stated Jitania Kandhari, deputy chief investment officer at Morgan Stanley Investment Management. She emphasized the shift towards seeking out companies across various sectors that are integrating AI technologies to drive profitability, moving beyond traditional investments in AI-focused sectors like semiconductors.
Foxconn, a key supplier to Apple, is set to establish ‘AI factories’ utilizing cutting-edge hardware from US technology leader Nvidia, including its chips and software solutions.
AI-related stocks have spearheaded a substantial US$1.9 trillion recovery in emerging markets this year. Companies in Taiwan and South Korea, such as Taiwan Semiconductor Manufacturing Co (TSMC) and SK Hynix, have notably contributed to 90% of this upsurge, as reported by Bloomberg.
Despite the remarkable rally, the valuation of most AI stocks in emerging markets remains notably more attractive compared to their US counterparts. While Nvidia is trading at 35 times its estimated earnings, prominent Asian AI corporations are typically valued at a more conservative range of 12 to 19 times earnings.
Furthermore, emerging markets present a promising landscape for growth. Analysts anticipate a significant 61% surge in earnings for technology firms in developing economies, overshadowing the projected 20% increase for their US counterparts, according to Bloomberg data.
Samsung and TSMC, along with MediaTek, a leading chip manufacturer, are featured in a JPMorgan fund specializing in Taiwanese equities, outperforming 96% of over 1,400 comparable funds. These companies also rank among the top holdings in the iShares MSCI EM Ex-China ETF, which has doubled in value over the past five months.
Anuj Arora, head of emerging markets and Asia-Pacific equities at JPMorgan Asset Management, highlighted the transformative potential for tech suppliers to evolve into industry leaders themselves, given their early adoption of AI technologies.
The growing interest in AI is evident as more investors are channeling funds into this sector. For instance, Hanmi Semiconductor Co in South Korea, a company primarily owned by the Kwak Dong Shin family, has witnessed a remarkable 120% surge this year, emerging as the top performer among members of the MSCI Emerging Markets Index. Similarly, FPT Corp, an IT services provider in Vietnam, has experienced a nearly 20% increase in its stock value, propelling the Ashmore EM Frontier Equity Fund as the leading performer among actively managed emerging market funds in the US.
Investor enthusiasm is also palpable in exchange-traded funds focused on emerging markets, with a significant portion of investments flowing into the iShares MSCI EM ex-China ETF. This ETF includes key players investing in AI technologies, signaling a growing trend towards AI adoption in emerging markets.
Moreover, established enterprises are garnering fresh investor attention by signaling their foray into AI. For example, Reliance Industries in India, led by billionaire Mukesh Ambani, has developed an AI model akin to ChatGPT with multilingual capabilities in 22 Indian languages. The company is actively participating in India’s digital transformation, catering to its vast population of 1.4 billion.
While the potential benefits of AI investments in emerging markets are substantial, there are inherent risks. The interconnectedness of emerging markets with the US implies that an AI market downturn in the US could reverberate globally. Conversely, a broad-based stock market upturn may lead to other sectors catching up, potentially causing AI stocks to lag behind.
Nonetheless, investors are increasingly exploring opportunities in emerging markets as alternatives to the overextended US tech stocks, recognizing the untapped potential of AI as a driving force for future growth, as emphasized by Jitania Kandhari from Morgan Stanley Investment Management. She underscored the abundance of opportunities waiting to be harnessed in the realm of AI within emerging markets.
