Emerging-Market Equities Offer More Than Chips and Memory

The opportunity set across emerging markets is much wider than the AI-driven rally suggests.

Emerging-market (EM) equities have benefited enormously from the global AI investment boom. But headline market gains show that EM leadership has become concentrated in a handful of mega-cap technology stocks. In our view, today’s EM benchmark is far less diversified than many investors assume, creating opportunities to seek differentiated sources of return.

After a protracted period of underperformance, EM equities have generated strong returns since the beginning of 2025, with momentum continuing through July 2026. Returns have been buoyed by a small number of large firms in Taiwan and South Korea, which sit at the epicenter of the AI supply chain. These firms span memory, semiconductor manufacturing, packaging and testing, power systems, cooling technologies, networking, and AI server infrastructure. Robust demand from hyperscalers—large cloud-service and infrastructure providers—has driven exceptional earnings growth and upward earnings revisions for these Asian AI powerhouses.

Market Concentration Echoes US Trends

As a result, EM equities ranked among the best-performing asset classes in the first half of 2026. But EM returns have become increasingly dependent on a small number of companies. In fact, the 10 largest companies represent roughly 40% of the MSCI Emerging Markets Index (Display) by market cap, while just three stocks—Taiwan Semiconductor Manufacturing, Samsung and SK Hynix—comprise nearly one-third of the index. In the second quarter alone, these three stocks accounted for more than 60% of the index’s return. This level of concentration should sound familiar to investors who’ve navigated highly concentrated US equity markets in recent years.

Like their developed-market counterparts, these AI stalwarts have earned their leadership positions. In particular, chipmakers in Korea and Taiwan have seen some of the strongest earnings revisions globally, supported by robust export growth and ongoing demand for AI-related hardware.

Concentration Risk Is Hiding in Plain Sight

But healthy business dynamics don’t eliminate the vulnerability created by high market concentration, particularly for passive allocations. When market leadership narrows, passive portfolios are tethered to optimistic assumptions assigned to a small number of companies. Any demand shifts, slowdown in AI capex or supply chain disruptions can have an outsized effect on returns. In other words, we believe investors may be taking on more risk than they realize, especially in EM, where many benchmark-hugging passive strategies are often associated with diversification. With AI taking center stage, even today’s EM benchmarks provide limited breadth.

To be sure, AI-driven stocks have their place in an investment portfolio. But we believe investors should avoid letting exposure to the biggest names dominate portfolios and should instead look for lesser-known enablers and beneficiaries, what we call “backdoor” AI trades. Asia’s technology ecosystem offers a particularly diverse set of these opportunities, spanning businesses from memory and semiconductors to printed circuit boards, electronic components and cooling systems. Each has its own supply-demand dynamics, competitive structure and industry cycle. For active investors with deep local research capabilities, that diversity creates opportunities to move nimbly across the AI value chain—shifting exposure as valuations, fundamentals and individual product cycles evolve, rather than relying on a single expression of the AI theme.

There’s More to EM than AI

Fortunately, the opportunity set extends far beyond AI. While AI-related companies have captured headlines, they represent only one facet of the EM investment universe. Beyond AI, we see opportunities among industrial suppliers, firms implementing governance improvements and locally focused businesses more insulated from global volatility (Display).

In China, for example, economic conditions are uneven, but attractive opportunities have emerged in areas tied to industrial modernization, technology upgrades and advanced manufacturing. Investors are increasingly distinguishing between Chinese exporters seeing resilient demand and firms more closely tied to domestic consumption and investment trends. Nonetheless, improving earnings, coupled with an anti-involution program designed to stimulate growth, could serve as important growth drivers in China—particularly for overlooked value stocks.

Elsewhere in Asia, Vietnam is benefiting from global supply chain realignment as multinational companies diversify manufacturing footprints. And South Korea is instituting much-needed governance reforms that have unlocked shareholder value and improved capital discipline. Other Asian markets like India offer opportunities untethered to the AI narrative and driven more by resilient domestic demand, rising incomes and an expanding middle class.

The Importance of Geographic Diversification

Beyond Asia, we see opportunities in Latin America, Central and Eastern Europe, the Middle East, and Africa. Many of these regions are rich in natural resources and stand to benefit from supportive commodity fundamentals. At the same time, some EM countries are also using low-cost renewables to improve energy security—positioning EM as the growth engine of the energy transition.

Reshoring could also benefit EM. In Central Europe, countries such as Poland, the Czech Republic, Hungary and Romania are capitalizing on the growing trends of nearshoring and friendshoring, allowing Western European manufacturers to locate operations in nearby, geopolitically allied markets.

Both Latin America and Central European markets have relatively few technology companies in their equity markets (Display). As a result, their return patterns offer diversification benefits to other EM regions and developed markets.

The AI trade will continue to take center stage for some time and investors can’t afford to ignore it. Still, we believe EM shouldn’t be viewed solely through this one-dimensional prism. Across the vast EM landscape, equity return potential taps into economies at different stages of development with varied frameworks and growth trajectories. This is precisely the kind of diversity that we think can help reduce volatility and improve growth prospects over longer time horizons—particularly if the AI trade stumbles. The chips and memory giants may be driving today’s returns, but a more wide-ranging view of EM could help determine tomorrow’s winners.