Emerging Markets: The Undiscounted AI Frontier

Alastair Pinder, HSBC Head of EM/Global Equity Strategist, recently joined CNBC’s “Closing Bell Overtime” to discuss the burgeoning opportunities within emerging markets, particularly highlighting their unexpected role as a compelling, yet undervalued, play in the global artificial intelligence landscape. Speaking with hosts Scott Wapner and Sara Eisen, Pinder laid out a persuasive case for international diversification, arguing that while U.S. markets have commanded attention, emerging economies offer distinct advantages, especially for those seeking exposure to the AI revolution at a more favorable valuation.

The central tenet of Pinder’s argument is that emerging markets represent an AI investment opportunity at a significant discount. He states, “The big thesis to go into this area is that it essentially is an AI play, but at a huge discount, and doesn't have the same kind of ownership and the crowding like you see in some of these AI stocks in the US.” This insight challenges the prevailing narrative that AI investment is solely concentrated in a handful of mega-cap U.S. tech firms. Instead, Pinder points to Asian economies like China, Korea, and Taiwan, which boast robust technology and semiconductor sectors, as prime beneficiaries of the AI boom. These regions, he explains, are deeply integrated into the AI supply chain, yet their valuations do not reflect the same speculative froth seen in their Western counterparts. Crucially, many of these companies are not burdened by the immense capital expenditure (capex) that often accompanies the development of foundational AI models, allowing for potentially higher returns on investment.

A significant structural shift underpins this emerging market opportunity. Pinder highlights that "new economy sectors," encompassing technology, semiconductors, and electric vehicles, which once constituted merely 15% of the Emerging Market index, now account for nearly 40%. This dramatic re-weighting signifies a profound evolution in the composition of emerging market economies, moving beyond traditional sectors like utilities and banking. This shift ensures that investors in broader EM indices are gaining increasing exposure to the very industries driving global technological advancement, often without the elevated price tags or crowded ownership prevalent in developed markets.

Beyond the direct AI play, Pinder identifies a weakening U.S. dollar as a crucial tailwind for international equities. A depreciating dollar makes investments in foreign assets more attractive to dollar-denominated investors, boosting returns when converted back to the U.S. currency. This fundamental currency dynamic, which Pinder expects to persist into the coming year, provides a supportive backdrop for emerging market equities, enhancing their appeal irrespective of local market performance.

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Further bolstering the investment case for emerging markets are the dynamics of interest rates and valuation re-ratings, particularly in regions like Latin America and EMEA. Countries such as Mexico, Brazil, and South Africa have maintained exceptionally high interest rates—with bond yields reaching 7%, 15%, and 10% respectively. This elevated rate environment provides central banks in these nations significant leeway to cut rates, a move that directly supports equity valuations by lowering the cost of capital and increasing the present value of future earnings. While this might not translate into an “exciting earnings story,” as Pinder notes, the potential for a substantial “valuation re-rating” as rates normalize presents a compelling investment thesis for 2024.

Perhaps the most counter-intuitive insight offered by Pinder concerns the impact of trade policies and tariffs. While often viewed as detrimental to global trade and economic growth, he suggests they have, "weirdly," been a "good thing for international markets." The reasoning is that tariffs have spurred governments in affected regions, such as China and Germany, to implement domestic stimulus measures to offset their negative effects. This policy response has, in turn, stimulated local economies and infrastructure spending. As tariff uncertainties begin to recede and new trade deals emerge—like the potential USMCA deal for Mexico—these markets stand to benefit from both reduced trade friction and the sustained impact of earlier stimulus. This dual effect could unlock further growth, proving that even adverse geopolitical events can inadvertently create unique opportunities for astute investors in the global landscape.