Emerging Markets: AI Boom Set to Drive Returns for Years

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00:00Emerging market funds are piling into tech to ride the artificial intelligence boom on

00:05expectations it will drive returns for the next decade. It's already been a winning trade. AI

00:11companies are the six biggest contributors to the rally in Bloomberg's EM stocks index this year.

00:17For more, let's bring in Srini Sivabalan, our senior emerging markets editor, who's joining

00:22us now. So Srini, if the U.S. is the epicenter of AI, which many investors we speak to do say

00:28it is, why are they now looking to emerging markets for this trade?

00:35Good morning, Jennifer. Thanks for having me. First of all, emerging markets have an advantage

00:41over the U.S. in AI because U.S. AI is a bet on the U.S. winning the global AI race, right?

00:48But emerging markets are like a hedged portfolio where if the U.S. wins the global AI race,

00:54there's one set of companies that can succeed, Taiwan Semiconductor Manufacturing Corporation,

01:00SK Hynix, and so on. And then if China makes strides in AI, there's a whole set of stocks that

01:08will win, Alibaba, Tencent, Xiaomi, and so on. So irrespective of how AI shapes from here on,

01:17emerging markets do have a winning, you know, a chance at winning the AI race.

01:23So that is the key advantage that emerging markets have over the U.S. However, the valuations are

01:29quite reasonable at this point. You would say NVIDIA trades at about 35 times forward earnings.

01:37In the emerging markets, in comparison, you have TSMC that trades at like 18 and Alibaba trading at 13

01:44times PE. So valuations are another compelling reason.

01:47But Srini, as your story points out, the rally is really currently fixated on a number of major

01:55companies that we talk about quite often. How long is this likely to continue?

02:03Well, yeah, that's anybody's guess. But AI is a mega trend that's spreading around the world,

02:11and it can go beyond, you know, temporary fluctuations in the risk sentiment. And that is

02:19one thing that we have seen in the last two years, that even though investors' perception of

02:24emerging markets, you know, ebbed and flowed, we have seen AI making steady progress because

02:30this is a generational opportunity.