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AI revolution in emerging markets: The investment opportunity You're missing!

AI revolution in emerging markets, financial news

Global money management firms are increasingly looking for opportunities in the field of artificial intelligence (AI) beyond the United States. This trend has emerged as the AI sector has experienced significant growth and interest worldwide, particularly in U.S. companies such as Nvidia Corp., which have seen substantial increases in their market values. As a result, investors are turning their attention to emerging markets, expecting to find not only better value but also a broader range of investment options. This shift in focus represents a strategic move to diversify portfolios and tap into the potential of AI in markets that are still developing.

The rush towards AI has led to notable market increases for U.S. companies, such as a three-fold increase in the value of Nvidia Corp. and a 50% jump in a key U.S. semiconductor index within a year, as reported by Bloomberg.This enthusiasm is now extending to emerging markets, where investors see untapped potential They believe these markets offer both better value and a wider selection of investment possibilities in the AI sector. This global AI euphoria reflects the growing recognition of AI's transformative potential across various industries.

Goldman Sachs Group Inc.'s asset management arm is particularly interested in investing in components of the AI supply chain. This includes specialized hardware like cooling systems and power supplies, which are essential for the efficient operation of AI technologies. This strategic direction indicates a nuanced understanding of the AI sector, recognizing the importance of not just the technology itself but also the supporting infrastructure that enables it to function effectively.

JPMorgan Asset Management is looking towards traditional electronics manufacturers that are transitioning into AI leaders. This strategy involves identifying companies with a solid foundation in electronics that are now incorporating AI into their products and operations. The goal is to find businesses that, although not originally AI-focused, are adeptly adapting to incorporate AI into their core activities, potentially offering a competitive edge in the market.

Morgan Stanley's investment managers are exploring opportunities in non-tech sectors where AI is reshaping business models. They are looking beyond the usual tech companies and focusing on industries where AI applications can significantly enhance efficiency, customer experience, and profitability. This approach indicates a belief in the pervasive impact of AI across various sectors, not just within the technology industry.

Jitania Kandhari, deputy chief investment officer at Morgan Stanley Investment Management, highlights AI as a crucial growth driver in emerging markets. Her focus extends beyond the direct beneficiaries of AI, like semiconductor companies, to include businesses in diverse industries that leverage AI to boost their earnings. This perspective shows a comprehensive view of AI's potential, recognizing its role in enhancing performance and profitability across a wide array of sectors.

AI stocks have been instrumental in a $1.9 trillion rebound in emerging markets. Companies like Taiwan Semiconductor Manufacturing Co. and SK Hynix Inc. from Taiwan and South Korea, respectively, are significant contributors, accounting for 90% of these gains. This statistic underscores the central role of semiconductor companies in the current AI-driven market growth, reflecting the critical importance of these components in the AI technology ecosystem.

Despite their recent rally, AI stocks in emerging markets are generally more affordable than their U.S. counterparts. For example, while Nvidia trades at 35 times its projected earnings, Asian AI giants are typically valued at more reasonable ratios of 12 to 19 times. This valuation disparity suggests that emerging-market AI stocks may offer better value for investors, providing an attractive entry point into the AI market without the premium pricing often associated with U.S. tech stocks.

Emerging markets are poised for faster growth compared to developed markets. Analysts anticipate a 61% increase in earnings for technology companies in emerging markets, a much steeper rise than the 20% growth forecasted for their U.S. counterparts as we read in Bloomberg. This projection indicates stronger potential for return on investment in emerging markets, driven by a rapidly evolving technology sector and a faster pace of economic development.

Companies like TSMC and Hon Hai Precision Industry Co. are leading the AI charge in emerging markets. They were already established technology leaders before the AI surge, and now they're leveraging this foundation to excel in the AI arena. Their success suggests that companies with robust technological expertise and infrastructure are well-positioned to transition into and capitalize on the growing AI market.

The same companies are also prominent in successful investment funds. For example, a JPMorgan fund focusing on Taiwanese equities, which includes these companies, has outperformed 96% of its peers. Additionally, these stocks are top holdings in the iShare MSCI EM Ex-China ETF, which has seen its value double over five months. This performance demonstrates the lucrative potential of investing in companies at the forefront of AI in emerging markets.

Anuj Arora, head of emerging markets and Asia Pacific equities at JPMorgan Asset Management, suggests that tech companies historically supplying to major brands could become significant players in their own right. Their early adoption of AI positions them ahead of competitors in exploiting new technological evolutions. This insight highlights the shifting dynamics in the tech industry, where supply chain players can evolve into leading innovators and market leaders through strategic use of AI.

The growth in the AI sector is attracting more investors, broadening the market. For instance, Hanmi Semiconductor Co. in Korea, primarily owned by billionaire Kwak Dong Shin’s family, has seen its value increase by about 120% this year, marking the best gains in the MSCI Emerging Markets Index. This surge also corresponds with a growing foreign ownership stake, indicating increasing international investment interest in emerging-market AI companies.

In Vietnam, the IT services provider FPT Corp. has experienced a near 20% rise in its stock value this year. This growth has boosted the performance of the Ashmore EM Frontier Equity Fund, making it a top performer among actively managed emerging market funds in the U.S. Such trends illustrate the expanding impact of AI on various sectors in emerging markets, highlighting opportunities beyond traditional tech companies.

For exchange-traded funds (ETFs) focused on emerging markets, there has been a significant influx of capital. Notably, over half of all inflows this year have been directed into the iShares MSCI EM ex-China ETF. Its top 10 holdings include companies investing in AI, showing investors' growing interest in incorporating AI-focused companies into their portfolios. This pattern suggests a strategic shift in investment towards AI as a critical component of emerging market growth.

AI's expansion is not limited to new tech startups. Established businesses in regions like Saudi Arabia and India are attracting investor interest by integrating AI into their operations. For example, Alibaba's cloud partnership with Saudi Telecom Co. in Saudi Arabia and Reliance Industries Ltd.’s development of a multilingual AI model in India are indicative of this trend. Such initiatives demonstrate how traditional companies can rejuvenate their business models and market relevance by adopting AI technologies.

Luke Barrs from Goldman Sachs mentions the emergence of a "national champions" mindset regarding AI in some markets. This perspective suggests that countries are increasingly interested in nurturing homegrown companies to become leaders in AI, viewing this technology as a strategic asset both economically and technologically. This trend reflects a broader geopolitical aspect of AI, where countries aim to establish dominance or self-reliance in this critical sector.

Emerging markets, however, are not isolated from global economic trends, particularly those in the U.S. An AI market downturn in the U.S. could have ripple effects worldwide, indicating the interconnectedness of global markets. Conversely, a broad-based stock market gain could lead to a catch-up effect in other sectors, potentially causing AI stocks to underperform compared to other industries. This interdependence highlights the importance of considering global economic dynamics when investing in AI within emerging markets.

Morgan Stanley's Kandhari notes that investors are finding attractive alternatives to U.S. tech stocks in emerging markets. These markets are perceived as offering fresh opportunities, especially in AI, which is seen as an underappreciated growth driver. The notion of "low-hanging fruit" suggests that there are numerous accessible opportunities for significant gains in these markets, driven by AI's transformative potential.



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