Wall Street is Hunting for AI Winners Beyond NVIDIA in Emerging Markets

Major players in global finance are on the lookout for the next generation of artificial intelligence (AI) frontrunners outside the United States. While the fervor surrounding AI has propelled a significant surge in Nvidia Corp. by threefold and a 50% leap in a key U.S. index for semiconductor manufacturers in less than a year, investors are increasingly turning their attention to emerging markets for better value propositions and a broader spectrum of investment opportunities.

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Goldman Sachs Group Inc.'s asset management arm is particularly interested in acquiring stakes in AI supply-chain component manufacturers, focusing on entities involved in producing cooling systems and power supplies. JPMorgan Asset Management prefers traditional electronics manufacturers transitioning into AI leaders, while investment managers at Morgan Stanley are placing their bets on companies in non-tech sectors where AI is reshaping business models.

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"We see AI as a growth driver in emerging markets," stated Jitania Kandhari, deputy chief investment officer at Morgan Stanley Investment Management. "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."

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AI stocks are spearheading a $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. dominating the gains. Despite this surge, most AI stocks in emerging markets still offer significantly better value compared to their U.S. counterparts. While Nvidia trades at 35 times its projected earnings, Asian AI giants typically boast valuations between 12 and 19 times.

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Emerging markets also present opportunities for faster growth. Analysts anticipate a 61% increase in earnings for emerging-market technology companies as a whole, dwarfing the projected 20% rise for U.S. peers.

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The spotlight currently shines on companies that were already technology leaders prior to the AI boom, including TSMC and Hon Hai Precision Industry Co. These companies, alongside MediaTek Inc., feature prominently in JPMorgan's single-country fund investing in Taiwanese equities, which has outperformed 96% of its peers. They 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.

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"The tech companies that have historically been the suppliers to the big names may well emerge as the big players themselves," noted Anuj Arora, head of emerging markets and Asia Pacific equities at JPMorgan Asset Management. "The early adaptation of this technology means these companies are far ahead of their competitors in leveraging newer evolutions."

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The excitement surrounding AI is expanding, drawing in more investors. For instance, Hanmi Semiconductor Co. in Korea, majority-owned by billionaire Kwak Dong Shin's family, has surged about 120% this year, leading gains among members of the MSCI Emerging Markets Index. Similarly, Vietnam's IT services provider FPT Corp. has witnessed a nearly 20% increase this year, propelling the Ashmore EM Frontier Equity Fund as the top performer among actively managed emerging market funds in the U.S.

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Investors are increasingly turning to exchange-traded funds (ETFs) focused on emerging markets, with more than half of all inflows this year pouring into the iShares MSCI EM Ex-China ETF, which includes companies investing in AI.

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In addition to these developments, established businesses are garnering fresh investor interest after signaling their foray into AI. Saudi Arabia is emerging as a hub for Chinese AI ventures, exemplified by Alibaba Group Holding Ltd.'s cloud partnership with Saudi Telecom Co. Meanwhile, India's Reliance Industries Ltd., led by billionaire Mukesh Ambani, has developed a chatGPT-style model with capabilities in 22 Indian languages, indicating its involvement in the digital transformation of the nation.

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"We would point to the potential 'national champions' mindset that is developing around AI in some markets," remarked Luke Barrs, global head of fundamental equity client portfolio management at Goldman Sachs. "Countries are focused on fostering homegrown companies that can be future leaders."

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While emerging markets are closely intertwined with the U.S., meaning that an AI selloff could reverberate globally, investors are increasingly exploring alternatives to overextended U.S. tech stocks in emerging markets, viewing AI as an underappreciated driver of growth. "There's a lot of low-hanging fruit to juice there," added Morgan Stanley's Kandhari.

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