‘LOW-HANGING FRUIT TO JUICE’
INVESTORS SEARCH FOR AI WINNERS OUTSIDE THE U.S.
Some of the world’s biggest money managers are searching for the next wave of artificial intelligence winners beyond the United States.
At a time when the global euphoria about AI has propelled a three-fold surge in Nvidia Corp. and a 50 per cent jump in a key U.S. index for semiconductor manufacturers in less than a year, investors are pointing toward emerging markets for better value and a bigger pool of options.
The asset management arm of Goldman Sachs Group Inc. said it’s looking specifically for stakes in the manufacturers of AI supply-chain components, such as cooling systems and power supplies. Jpmorgan Asset Management favours traditional manufacturers of electronics that are morphing into AI leaders, while investment managers at Morgan Stanley are betting on players where AI is reshaping business models in non-tech sectors.
“We see AI as a growth driver in emerging markets,” Jitania Kandhari, deputy chief investment officer at Morgan Stanley Investment Management, said. “While we have previously invested in direct AI beneficiaries like semiconductors, going forward, it will be key to look for companies in different industries that are adopting AI to enhance earnings.”
AI stocks are already leading a Us$1.9-trillion rebound in emerging markets this year, with Taiwanese and South Korean chip companies such as Taiwan Semiconductor Manufacturing Co. and SK Hynix Inc. accounting for 90 per cent of the gains, according to data compiled by Bloomberg.
Despite this rally, most emerging-market AI stocks still offer far better value than their U.S. peers. While Nvidia trades at 35 times its projected earnings, Asian AI giants are typically valued between 12 and 19 times.
Developing markets also offer faster growth. Analysts expect a 61 per cent increase in earnings for emerging-market technology companies as a whole, compared to the 20 per cent rise that they were pencilling in for U.S. peers, according to data compiled by Bloomberg.
STARS OF THE SHOW
So far, the stars of the show are those companies that were already technology leaders prior to the AI rally, such as TSMC and Hon Hai Precision Industry Co.
The duo and Mediatek Inc., also a chipmaker, feature in a Jpmorgan single-country fund that invests in Taiwanese equities and has outperformed 96 per cent of more than 1,400 peers. The three stocks are also among the top-10 holdings of the ishare MSCI EM Ex-china ETF, which has doubled in value over the past five months.
“The tech companies that have historically been the suppliers to the big names may well emerge as the big players themselves,” Anuj Arora, head of emerging markets and Asia Pacific equities at Jpmorgan Asset Management, said. “The early adoption of this technology means these companies are far ahead of their competitors in leveraging newer evolutions.”
Still, the buzz is widening and more investors are pouring in money.
For example, Korea’s Hanmi Semiconductor Co., majority-owned by billionaire Kwak Dong Shin’s family, has surged about 120 per cent this year for the best gains among members of the MSCI Emerging Markets Index. It has also had its share of foreign ownership increase in recent weeks, according to data compiled by Bloomberg.
In Vietnam, IT services provider FPT Corp. has jumped almost 20 per cent this year, lifting the Ashmore EM Frontier Equity Fund as the best performer among actively managed emerging market funds in the U.S.
For Em-focused exchange-traded funds in the U.S., more than half of all inflows this year have gone into the ishares MSCI EM ex-china ETF, whose top 10 holdings include companies that are investing in AI, according to data compiled by Bloomberg. A Taiwan-based fund, Yuanta Taiwan Value High Dividend ETF, got US$5 billion of fresh deposits in the week through April 3, reversing Em-wide outflows for the period into inflows, according to EPFR Inc.
SAUDI ARABIA A HOTBED
Elsewhere, established businesses have attracted fresh investor interest after signalling that they’re moving into AI.
Saudi Arabia is becoming a hotbed for Chinese AI ventures, such as Alibaba Group Holding Ltd.’s cloud partnership with Saudi Telecom Co.
India’s Reliance Industries Ltd., the petroleum giant run by billionaire Mukesh Ambani, has developed a chatgpt-style model with capabilities in 22 Indian languages. The company is also part of the digital transformation in the country of 1.4 billion people.
“We would point to the potential ‘national champions’ mindset that is developing around AI in some markets,” Luke Barrs, global head of fundamental equity client portfolio management at Goldman Sachs, said. “Countries are focused on fostering homegrown companies that can be future leaders.”
THE TRADE IS NOT WITHOUT ITS RISKS.
Emerging markets are tied closely to the U.S., meaning that an AI sell-off could echo across the world. Alternatively, if stock-market gains broaden out, then other sectors may catch up and AI names could lag behind.
Still, investors are increasingly finding EM alternatives to U.S. tech stocks that have overextended themselves, said Morgan Stanley’s Kandhari.
“In emerging markets, they are seeing AI as an underappreciated driver going forward,” she said. “There’s a lot of low-hanging fruit to juice there.”