AI trade keeps capital – and risks – flowing to emerging markets

For the most dramatic change in a benchmark index in financial markets in recent years, look no further than the stock markets of developing economies. Just over a year ago, mainland China and India had a combined weight of 50 per cent in the MSCI Emerging Markets Index. Fast forward to today, and it is South Korea and Taiwan that account for over half of the gauge.

At the end of last month, the weight of South Korea in the index stood at nearly 24 per cent, four percentage points more than that of China, whose economy is almost 10 times the size of South Korea’s. The weight of Taiwan’s economy alone stood at 27 per cent. That’s double the weight of India’s 11 per cent.

South Korea and Taiwan, the world’s leading semiconductor manufacturing hubs, have led the rally in emerging market equities in spectacular fashion as an AI-fuelled surge in corporate earnings in both markets drives a revival in the stock markets of developing economies.

Taiwan’s statistics agency predicts the economy will grow nearly 10 per cent this year, powered by rapid growth in exports stemming from the AI boom. In South Korea, semiconductor exports soared 180 per cent in annualised terms in the first three weeks of this month. South Korean and Taiwanese stocks are up a staggering 61 per cent and 53 per cent respectively this year.

“Unlike in developed markets, AI in [emerging markets] is not just a narrative. It is already embedded in the real economy, driving productivity gains, reducing costs and improving margins”, said Carmignac.