Beyond semiconductors and memory chips, emerging Asian manufacturers also offer “backdoor,” less-known AI exposures such as power and thermal management, and data-center components. Not only are these less visible investment opportunities, but they also benefit from higher barriers to entry and longer investment cycles, in our analysis.
Reconfiguration of Supply Chains Makes Security Selection Vital
We expect emerging countries to reconfigure their supply chains to mitigate the impact of the oil shock and its second-order effects.
Accordingly, from a security-selection perspective, it’s vital to identify the winners and losers within the same value chain. We think the big winners will have higher technology standards, offer greater reliability and align geopolitically.
For instance, the disruptions to natural gas supplies have increased global demand for LNG carriers. But competition is limited, as the costs of entering this market are high, standards are technically demanding, and China and Korea dominate the market. Because energy has become a prominent national security concern, some western buyers may feel reluctant to buy from China, making Korean shipyards the winner by default.
In our view, conflict-driven deglobalization need not reduce the opportunity for emerging-market investors. But it will require more selectivity and intensive bottom-up research to identify the companies in the right parts of the value supply chain.
China Remains Central to the Outlook
China’s economy remains crucial for the Asia-Pacific region and for many emerging countries worldwide, and although China’s property market and domestic consumption remain soft, there are encouraging signs for emerging-market trading partners.
Chinese policymakers have recommitted to keeping real GDP growth between 4.5% and 5%. We also expect them to help ease some of the disinflationary impulses in the economy.
We see several structural positives for China’s securities markets: the government’s anti-involution measures to reduce overcapacity; improving corporate governance (evidenced by more dividends and buybacks); improved capital discipline resulting in negative net equity issuance; and China’s strong position in critical technologies and commodities, especially those linked to electrification.
We’re already seeing more attractive opportunities in insurance and financial companies because the shareholder-friendly policy shift has led to stronger balance sheets in these sectors.
Stay Alert to Risks—and Rebounds
Rather than treating emerging markets as a single macro trade, we think investors should consider allocating selectively across regions and countries and tilting tactically between emerging equity and debt. They can also use multiple security selection techniques to focus on companies with resilient earnings, pricing power and strategic relevance.
Periods of heightened volatility have historically created opportunities. Our research indicates that, following periods of high volatility where valuations become disconnected from fundamentals, emerging markets have bounced back more strongly than their developed counterparts. We favor building positions in well-placed emerging countries and companies ahead of a normalization in volatility and sentiment.
