HOLT Emerging Markets View: Finding Growth with or without AI

Research evidence excerpt

HOLT Emerging Markets View: Finding Growth with or without AI

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HOLT Emerging Markets View Equities

Emerging MarketsFinding Growth with or without AI

Selim Gogus, FCA

HOLT Sector Specialist

The global tilt towards AI has driven EM concentration risk selim.gogus@ubs.com

+44-20-7888 6483

The MSCI EM Index has become increasingly concentrated given the dominance of the

AI narrative. TSMC, Samsung, and SK Hynix now account for c. 30% of the index and

also a combined market cap greater than all remaining 473 Korean and Taiwanese

stocks, as noted in Michel Lerner's recent HOLT Global Viewpoint (See AI Overheat:

Three Reality Checks about Competitive Lifecycles).

Diversifying across the AI value chain

It is fair to say that the MSCI EM Index has become more of an extension of the AI

theme, given the market concentration of the three largest constituents, all of which are

also very long crowded based on the UBS Quant Research crowding factor. Despite EM

AI-theme stocks continuing to trade at a valuation discount to developed market peers

(Figure 3HOLTP/B-AIThemeStocks-DevelopedMarketsvEmergingMarkets), there may be a need to proceed with caution, given that, in aggregate, AI-

related stocks are forecast to generate peak CFROI levels and the durability of these cash

flows is being debated by the market (see Figure 5CFROIProfile-EMAIValueChain).

Given such concentration risk and uncertainty, there is a strong case for diversifying

within the AI theme, particularly where investors approach fund limits on single-stock

exposure. We leverage the HOLT Scorecard to identify EM stocks across the AI supply

chain that offer AI exposure with attractive valuation and momentum peer ranks, as