Emerging markets: Riding the tech tiger

Three technology tigers – TSMC, Samsung Electronics, and SK Hynix – have dominated emerging market (EM) returns.¹ Their rapid growth has rewarded investors but left the benchmark increasingly reliant on a narrow trade. After several years of technology-led gains, recent volatility has heightened concerns about the eventual dismount.

The pullback in artificial intelligence (AI)-related hardware stocks has intensified that debate. The current investment cycle is already operating on an extraordinary scale. For active investors, periods of strength may offer opportunities to take profits and diversify. Yet there are also reasons to remain invested. The challenge is to manage risk without losing exposure to one of the most powerful investment themes of the decade.

Saddling the tiger

Risks have risen as pressure mounts on US technology companies to monetize their rapidly growing AI investment. Capital expenditure (CapEx) among Amazon, Google, Meta, Microsoft, Nvidia, and Oracle has risen rapidly as these companies build the infrastructure needed to support AI development and adoption. How quickly that spending produces an adequate return remains uncertain, particularly because the economics of AI models are still developing.

The sharp acceleration in CapEx highlights both the scale of the AI build-out and the pressure on the companies funding it to generate adequate returns (Chart 1).

For Asian hardware suppliers, however, focusing solely on end-user economics risks overlooking an important distinction: the companies funding the AI build-out are not the same as those supplying the equipment behind it. Data center owners and AI platform providers must ultimately earn an adequate return on their capital to satisfy investors and service their growing debt burdens.

In our view, that is where the principal risk resides. By contrast, AI hardware suppliers are generating revenue today, supported by the scale of contracted demand. Long-term hardware purchase commitments across the wider AI ecosystem now run into the trillions of US dollars. These commitments support earnings visibility and reduce some of the risk associated with adding capacity. They do not, however, eliminate the possibility of overcapacity if end demand disappoints.

Tracking the CapEx surge

Put simply, one company’s CapEx is another company’s revenue.

Some critics point to cyclically adjusted earnings multiples as evidence that these businesses are already expensive. Yet such measures are most useful when assessing businesses operating within an established market, with earnings that move around a relatively stable long-term trend.

This semiconductor cycle combines a capacity constrained upswing with a structural expansion in the sector’s economic importance as AI adoption spreads across consumer and enterprise applications. Investors must therefore distinguish between temporarily elevated earnings and the potential for a sustainably larger revenue pool.

We expect the cycle to unfold in three phases:

Along the way, Asian hardware suppliers must decide how to allocate the earnings windfall among shareholders, new capacity, employees and policy-aligned investment.

We are already seeing the opening moves. Samsung Electronics has announced plans for substantial shareholder returns, while SK Hynix has also outlined significant capital returns.² Both appear to be moving toward returning around 50% of free cash flow to shareholders while continuing to invest in capacity and employee compensation. Together, these announcements illustrate both the scale of cash generation and the importance of disciplined capital allocation.

Caging the tiger

Concentration risk presents a different challenge. While the three technology leaders have driven much of the market's recent performance, active investors can seek differentiated sources of return elsewhere in the opportunity set.

Ownership data show how widely these companies are held across the active EM universe. More than 90% of active EM funds own TSMC, while more than 80% own Samsung Electronics, and more than 70% own SK Hynix.³ In that sense, the three tech tigers increasingly provide the market’s beta.

For active managers, the opportunity lies in complementing that exposure with companies offering differentiated return potential. Selective profit-taking can also release capital for opportunities elsewhere in the market.

Investors in Asian hardware suppliers must remain alert to concentrated market leadership and increasingly optimistic earnings expectations. Yet while CapEx guidance continues to rise and companies funding the AI build-out retain access to capital, the cycle retains support.

Endnotes

¹ MSCI Emerging Markets Index, October 2026. ² "Samsung, SK Hynix payouts test South Korea's reform drive as investors seek more." Reuters, September 2026. ³ Copley Fund research, August 2026.

Important information

Past performance is not an indication of future results.
Diversification does not ensure a profit or protect against a loss in a declining market.
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
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.
Investments in technology- and AI-related companies may be more volatile than investments in other sectors. These companies face risks associated with rapid technological change, competition, cybersecurity incidents, data privacy concerns, supply chain disruptions, evolving regulation, and changing market demand. AI technologies are relatively new, and their long-term commercial success remains uncertain. Expectations for future growth may not be realized, which could adversely affect the value of investments in these companies.

AA-071026-213801-1