How emerging markets may help investors escape domestic 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 datacenter expansion.

But unlike the US mega caps, where valuations hinge almost entirely on flawless AI monetization, 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-industrialization, 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 accounts 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.³

These companies dominate returns, valuation multiples, and sentiment. While their innovation is undeniable, their pricing now embeds assumptions about AI adoption and monetization 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 believe 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&P 500 – vs. a long-term average discount of some 32%.^4,5,6

And 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.

Endnotes

¹ Aberdeen, Factset consensus estimates, January 2026.
² Aberdeen, UBS, January 2026. Data market cap weighted.
³ The Magnificent Seven refers to a group of seven large companies in the US markets: Microsoft, Apple, NVIDIA, Alphabet, Amazon, Meta Platforms, and Tesla.
⁴ MSCI Emerging Markets Index℠ is an unmanaged index considered representative of stocks of developing countries. The index is computed using the net return, which withholds applicable taxes for non‐resident investors.
⁵ S&P 500® Index is an unmanaged index considered representative of the US stock market.
⁶ CLSA, September 2025.

Important information

Companies mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security.
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
Diversification does not ensure a profit or protect against a loss in a declining market. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.

AA-110226-204140-1