Is AI a New Engine for Emerging-Market Equity Investors?

10 July 2024

4 min read

There’s more to artificial intelligence (AI) than the US tech giants. Equity investors can find overlooked opportunities in emerging-market companies.

Historically known for low-cost manufacturing, emerging markets have rapidly shifted focus to become active participants—and in some cases leaders—in the global technology revolution.

More than 10,000 tech companies have been founded in emerging markets since 2014, with Asia, Africa, Latin America and the Middle East all participating in this innovation boom. And while this growth spans the broad technology spectrum, emerging markets are playing an increasingly influential role in the delivery of AI-enabled technologies.

AI is set to change the way we live. From information processing to transportation, AI is having a profound effect on the way we interact, work and socialise. As a result, the global AI market is projected to grow from US$86.9 billion in 2022 to US$407.0 billion in 2027, a compound annual growth rate of more than 36%.¹

Finding Opportunities in Asian Semiconductors

While AI processing chips tend to dominate the headlines, high-speed memory is also a critical component for AI servers. Two Korean companies, for example, are competing with a US-based firm for control of this market.

Demand for High-Bandwidth Memory Is Forecast to Grow Rapidly

HBM Demand Forecast from AI Applications

Bar chart shows projected growth in two types of high-bandwidth memory from 2023 through 2026.

Past performance and historical analysis do not guarantee future results.
HBM: high-bandwidth memory
CAGR: compound annual growth rate
As of March 31, 2024
Source: Goldman Sachs

There’s More to AI than Chips

AI applications rely on advanced computer servers that can handle the massive computing power required for new AI-enabled applications. These complex servers require a multitude of high-performance components, in addition to the core processor and other semiconductors, like memory chips, and demand advanced assembly, cooling and power-supply solutions.

While chip-design companies and applications giants dominate the market’s attention, other companies in the “middle” of the AI supply chain offer exposure to this rapidly growing market at more attractive valuations than the headline-grabbing US heavyweights. Many are based in emerging markets such as Korea and Taiwan. Using bottom-up research, investors can find technology hardware companies that are critical to the AI supply chain and have strong market positions and pricing power.

Capturing the Power of a Technology Revolution

Despite an impressive roster of technology companies, Asia appears to have been left behind in the global sector’s rerating over the last few years. While technology sector valuations in the US, Europe and Japan have risen substantially since 2019, in Asia ex-Japan, technology valuations have hardly budged (Display). We think investors could be potentially overlooking some attractive opportunities today.

Technology Sector Valuations Are More Attractive in Emerging Markets

Price-to-Forward-Earnings Ratio (Next 12 Months)

Chart compared price-to-book ratios of technology sector companies in June 2019 and June 2024 in the US, Europe, Japan and Asia ex Japan.

Past performance and historical analysis do not guarantee future results.
As of June 30, 2024
Source: MSCI, Nasdaq and Bloomberg

To be sure, Asia’s technology industry has been volatile in recent years. Following the surge in technology demand during the Covid-19 pandemic, many Asian technology companies suffered from overcapacity and falling profitability; stock prices rose dramatically only to fall again rapidly in 2022. Companies are finally restoring a natural supply and demand pipeline, and a cyclical recovery is under way. On top of that, the AI-related infrastructure boom is now boosting the recovery.

The AI theme enjoys strong momentum. But we believe equity investors should search for more durable fundamentals. In particular, we see opportunities in companies that are inextricably linked to the supply chain and boast pricing and supply power backed by products that are essential ingredients for the high-profile AI players to succeed. In our view, a value-oriented approach, targeting companies with relatively cheap shares and underappreciated return potential, can be especially effective in the search for AI-driven opportunities in emerging markets.

By incorporating both fundamental and quantitative research, investors can identify quality businesses with these attributes that trade at more compelling valuations than the US technology giants. This approach may help investors capture the power of AI and find surprising return potential in the unsung, innovative emerging-market companies that are quietly enabling a global technology revolution.

1. Artificial Intelligence," MarketsandMarkets, https://www.marketsandmarkets.com/mega_trends/artificial_intelligence

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

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