AI rout spurs hunt for EM bargains

STOCK pickers seeking relief from the artificial intelligence (AI)-fuelled turbulence in global equities are zeroing in on opportunities in emerging markets (EM). 

The growing angst over AI has hit the main MSCI developing-country index hard, as chip giants SK Hynix Inc, Samsung Electronics Co and Taiwan Semiconductor Manufacturing Co together account for almost 30% of the gauge. Those stocks dragged the benchmark to a seven-month low last Friday before recovering. 

But looking beyond the AI trade, money managers say they’re seeing a chance to profit from rock-bottom valuations and high dividend yields in EMs, which by one metric are the cheapest since the global financial crisis 18 years ago. 

“Just hogging three or four names and being really concentrated actually doesn’t work over the long term,” says Sat Duhra, a portfolio manager at Janus Henderson Investors.

“There’s a whole bunch of other areas outside of AI that have worked really well, and that’s where we positioned.”

Duhra says that he’s been adding higher-yielding stocks in China and Hong Kong, citing “improving payout discipline”. Although Hong Kong is classified as a developed market, a large share of companies listed there are domiciled in China. “We are not yet tempted to rebuild exposure to tech,” he adds.

Investors highlight South American utilities, Chinese and Taiwanese consumer-goods manufacturers, and eastern and central European financial firms as compelling alternatives to AI-exposed stocks. 

The turmoil that hit equities last week, as fears grew that the Democrats’ sweep of US midterm elections could imperil the vast data centre buildout underpinning AI, left few markets untouched. 

After the Nasdaq 100 Index tumbled 6.4% last Thursday, stocks in Japan, Korea and and Taiwan got swept along the following day.

South Korea’s tech-heavy benchmark, which rallied in the first half as momentum-chasing retail investors piled in, sank to the lowest since March. Even Swiss stocks, notable for their limited exposure to AI, at one point fell the most in eight months. 

At the same time, last Friday’s dispersion of returns highlights how corners of EMs have been shielded from the AI fallout. Some 30% of stocks on the MSCI gauge rose last Friday, double the share of the S&P 500 that posted gains the day before, when it tumbled 4.4%. 

As investors turned wary of high levels of index concentration, passive funds saw an outflow for the first time in three years in October, according to Toni Meadows, head of investment at BRI Wealth Management.

“This is also a sign of rotation as it moves money away from the concentrated market indices,” he says. 

EMs have seen their own idiosyncratic blowups in recent months, ranging from a fund-manipulation scandal in Turkiye to MSCI’s threat to throw Indonesia out of its benchmark and the equities swoon that followed Luiz Inacio Lula da Silva’s surprise reelection last month. 

Still, a yawning valuation gap and the relatively low exposure to AI in corners of EMs are drawing some investors in. Expectations of less onerous US trade policies in the wake of US President Donald Trump’s setback in the mid-terms are providing another tailwind.   

The MSCI developing-nations benchmark trades at around eight times forecast earnings over the next 12 months – less than half the S&P 500’s multiple, despite offering a dividend yield about twice as high, data compiled by Bloomberg show.

The low MSCI ratio is in part a result of analysts rapidly raising their earnings estimates for the AI giants on the index. 

“Many non-tech sectors and markets in EM offer stronger long-term growth than their US counterparts, at significantly more attractive multiples,” says Maxence Visseau, chief investment officer of Arkevium Capital in Dubai. 

The rapid unwinding of the AI trade last week sent billions of dollars flowing into India, until recently a laggard this year. 

India’s NSE Nifty 50 Index jumped 2% last Friday, capping its best week since 2021, while other benchmarks across Asia and Europe were mired in red.

Inflows into the nation’s equities were on track to hit a weekly record even as valuations have swelled relative to EM peers, highlighting how traders are paying a premium for shelter from the AI ructions. 

“The no-brainer anti-AI trade should be India,” says Bing Yuan, a fund manager at Edmond de Rothschild who recently has begun adding exposure to the market, though she remains cautious on its dominant information technology services sector.

“If you want to switch out from AI, it should be a candidate.”

She also holds Chinese healthcare companies such as BeOne Medicines Ltd, which has advanced 37% in 2026, and Wuxi Biologics Cayman Inc, which has rallied 58%. 

South American equities are also starting to attract buyers after the bruising sell-off that greeted Lula’s win in Brazil over Flavio Bolsonaro, widely seen as the more market-friendly candidate. 

“Latin America is another region that presents minimal AI exposure, deep value, and commodities,” says Malcolm Dorson, senior portfolio manager at the US$93bil Global X Management in the United States. “Brazil’s volatility has left it with an extremely low bar for outperformance.” 

Dorson has been adding allocations to copper and gold miners, utilities and banks across the region. 

Robert Naess, a portfolio manager at Nordea Investment Management, has been shifting investments into telecommunications and consumer goods, buying shares in companies like Chinese sportswear maker Anta Sports Products Ltd and Taiwanese computer hardware manufacturer Getac Holdings Corp.

“I believe AI will have a major impact on the global economy, but that does not necessarily make AI stocks the best investments going forward,” says Naess, who oversees US$1.1bil in EM investments. — Bloomberg