BlackRock Inc. has returned to an overweight recommendation on emerging-market equities, betting that access to the scarce resources needed for the artificial-intelligence boom and strong earnings will drive outperformance.
South Korea and Taiwan “sit at the heart” of semiconductor and memory chip supply chains, while Latin American markets offer exposure to the commodities and infrastructure needed for the AI buildout, strategists in the company’s research arm, including Wei Li, wrote in a report on Monday. BlackRock expects growing investment in the technology to increase the value of those constrained resources and support corporate profits.
The move marks a reversal from June, when the world’s largest asset manager cut emerging-market equities to neutral from overweight, warning that AI concentration and leverage, particularly in South Korea, had weakened the risk-reward profile. BlackRock said deleveraging in Korean stocks following the sharp July selloff helped support the return to overweight.
The call will now hinge on whether faster earnings growth and cheaper valuations can outweigh risks from rising borrowing costs, elevated oil prices and geopolitical tensions. BlackRock also sees a weaker dollar and improving capital flows providing support as investors reassess emerging markets after recent volatility.
“AI-related investment can support growth and profits even as the same investment boom absorbs capital, power and other scarce resources,” the strategists added. “The numbers reinforce the case for returning to EM equities.”
Consensus forecasts show earnings for the MSCI Emerging Markets Index growing more than 34% over the next 12 months, versus about 20% for the MSCI USA Index, according to the note. Emerging-market equities trade at about 10 times forward earnings, roughly half the multiple of US stocks, representing a 50% discount, the strategists said.
“The bar for taking risk is rising as rates reset higher, making the durability of earnings more important,” the note added. “EM equities now offer another place where earnings can clear that higher hurdle.”
Bloomberg
