Leading global investment firms are broadening their horizons to identify the next big achievers in artificial intelligence (AI) outside the United States.
With the AI sector causing a significant buzz worldwide, resulting in a triple increase in Nvidia Corp.'s (NVDA, Financial) value and a 50% rise in a prominent US semiconductor index in under a year, investors are now turning their attention to emerging markets for more attractive valuations and diverse options.
Goldman Sachs Group Inc.'s asset management division is keen on investing in companies that produce essential AI supply chain components, such as cooling systems and power supplies. JPMorgan Asset Management is showing interest in traditional electronics manufacturers evolving into AI pioneers, whereas Morgan Stanley's investment managers are focusing on firms where AI is transforming business models in non-technological sectors.
Jitania Kandhari, Deputy CIO at Morgan Stanley Investment Management, emphasizes the potential of AI as a growth catalyst in emerging markets. The firm is not only interested in direct AI beneficiaries like semiconductors but is also looking to invest in companies across various industries that are leveraging AI to boost their earnings.
Emerging market AI stocks are spearheading a $1.9 trillion market rebound this year, with Taiwanese and South Korean semiconductor companies, such as Taiwan Semiconductor Manufacturing Co. (TSM, Financial) and SK Hynix Inc. (HXSCL, Financial), driving 90% of these gains. Despite this surge, these stocks are still more affordable compared to their US counterparts, with Nvidia trading at 35 times its projected earnings, while Asian AI giants are valued between 12 and 19 times.
Emerging markets are also poised for faster growth, with analysts projecting a 61% increase in earnings for technology companies in these regions, compared to a 20% increase for US companies.
Companies like TSMC, Hon Hai Precision Industry Co. (HNHPF, Financial), and MediaTek Inc. are leading the charge, featuring prominently in JPMorgan's Taiwanese equity fund, which has outperformed the majority of its peers. These companies, along with others, are also key holdings in the iShares MSCI EM Ex-China ETF, which has seen its value double over the past five months.
Anuj Arora, Head of Emerging Markets and Asia Pacific Equities at JPMorgan Asset Management, notes the advantage these tech suppliers have by adopting AI technology early, positioning them ahead of their competitors.
The interest in AI is expanding, with investors actively seeking opportunities. For instance, Hanmi Semiconductor Co. has seen a 120% increase in its value this year, making it one of the best performers in the MSCI Emerging Markets Index. Similarly, in Vietnam, IT services provider FPT Corp. has experienced a near 20% uptick, contributing to the success of the Ashmore EM Frontier Equity Fund.
Moreover, more than half of this year's inflows into EM-focused exchange-traded funds have been directed towards the iShares MSCI EM ex-China ETF, which includes companies investing in AI.
Additionally, established businesses are drawing new investor attention as they venture into AI. For example, Saudi Arabia is attracting Chinese AI ventures, including a cloud partnership between Alibaba Group Holding Ltd. (BABA, Financial) and Saudi Telecom Co., while India's Reliance Industries Ltd. (RELIANCE, Financial) is making strides in AI with a chatGPT-style model supporting 22 Indian languages.
Goldman Sachs highlights the emerging 'national champions' mindset, with countries nurturing homegrown companies to become future AI leaders. However, the enthusiasm for AI in emerging markets does not come without risks, as these markets are closely linked to the US, and any AI selloff could have global repercussions.
Nonetheless, the search for alternatives to overvalued US tech stocks is leading investors towards emerging markets, where AI is seen as an untapped growth driver with ample potential, according to Morgan Stanley's Kandhari.
