Equities: How emerging markets help investors escape US AI mania

But this is making investors uncomfortable as US valuations increasingly reflect a world where nothing is allowed to go wrong.

By contrast, emerging markets (EM) offer something refreshingly different: higher earnings growth potential, broader sector and geographic exposure, lower valuations, and meaningful participation in global investment cycles — including artificial intelligence (AI).

In a world where the US feels ‘priced for perfection,’ EM may be exactly the kind of diversification investors are seeking.

Earnings: AI-enabled, Not AI-dependent

Consensus expectations for 2026 point to 18% earnings growth for EM equities — comfortably ahead of developed markets [1]. AI plays an important role, but it is not the only driver.

North Asia remains foundational to the world’s AI infrastructure. Hardware producers in Korea and Taiwan continue to supply the memory, advanced logic and high-grade components underpinning AI models and data-centre expansion.

But unlike the US mega caps, where valuations hinge almost entirely on flawless AI monetisation, EM tech firms derive only a portion of their earnings from AI:

A more diversified earnings base is a strength rather than a limitation. EM companies are participating in the AI cycle without being priced as if AI must account for all future growth.

In fact, EM corporate earnings are benefiting from a series of cyclical and structural shifts: a recovery in ‘traditional’ memory markets, supportive currency dynamics, re-industrialisation, reconfigured supply chains, as well as rising domestic consumption.

Diversification

The second advantage EM offers investors is diversification — both away from the US, and within EM’s own multi-layered growth structure:

Diversifying beyond US

The extraordinary rise of the ‘Magnificent Seven’, which account for some 50% of the S&P 500’s returns since 2023, has left US markets with one of the highest levels of index concentration in modern equity-market history. 

These companies dominate returns, valuation multiples and sentiment. While their innovation is undeniable, their pricing now embeds assumptions about AI adoption and monetisation that leave little room for disappointment.

By contrast, EMs remain broadly diversified across geographies, sectors and revenue sources. No single company or sector dominates index returns.

Manufacturing hubs in Korea and Taiwan link directly to AI infrastructure; industrial exporters across Asia and Latin America feed into global re-tooling and re-shoring dynamics; domestic consumption growth in markets like India and parts of Southeast Asia provides a distinct, low-correlation earnings engine.

In a world where AI is helping drive a massive re-wiring of global supply chains — from electricity transmission and robotics to shipping, mining and grid infrastructure — EM’s breadth is also uniquely positioned to capture the spill-over effects.

If the US market does adjust in value, emerging market hardware firms will be impacted at first. However, we think EM will recover quickly because revenues and growth themes are diversified.

Diversifying beyond hardware

EM technology exposure is often misunderstood as purely hardware- driven. In fact, it spans cloud infrastructure; industrial automation; digital payments; semiconductors beyond AI applications; online services with expanding EM-to-EM linkages; and domestically developed AI ecosystems competing on cost and innovation.

Diversification is not just a risk-management benefit; it is a return driver, giving EM multiple pathways to participate in a global technology transition that is far broader than ChatGPT-style consumer AI.

Valuations: still attractive, still under-appreciated

Despite EM’s strong performance last year, valuations remain strikingly attractive. The MSCI Emerging Markets Index trades at a 42% discount to the S&P500 — versus a long-term average discount of some 32% [4].

This gap persists even though:

Investors are not paying for perfection. They are paying for earnings that already exist — not just anticipated — plus optionality on an AI cycle that is still in its early stages.

Final thoughts

As investors prepare for another year of great uncertainty, three messages are clear: