BlackRock recommended increasing the allocation to emerging-market stocks, despite the risks posed by AI
The investment giant expects profits at companies in emerging markets to grow nearly twice as fast as those in the U.S. over the next year
Investment giant BlackRock expects corporate earnings to grow faster in emerging markets than in the U.S. / Photo: David Tran Photo/Shutterstock.com
The world's largest investment firm, with $15 trillion in assets under management, has returned to recommending an overweight allocation to emerging-market stocks in portfolios, according to Bloomberg. BlackRock notes that these stocks are half as expensive as U.S. stocks relative to expected earnings, even though growth forecasts are higher.
Details
BlackRock raised its recommendation on emerging-market stocks from “neutral” to “overweight”—that is, it advised investors to increase the weighting of these securities in their portfolios. In June, the investment giant was forced to lower its rating, warning that concentration in artificial intelligence stocks and the use of leverage, particularly in South Korea, had worsened the risk-reward ratio. Following a sharp sell-off in July, the volume of leveraged positions in Korean stocks declined, which helped BlackRock revise its assessment, according to Bloomberg.
South Korea and Taiwan “are at the heart” of semiconductor and memory chip supply chains, while Latin American markets offer opportunities to invest in the raw materials and infrastructure needed for AI development, a team of BlackRock analysts led by investment strategist Wei Li wrote on September 14.
BlackRock expects that increased investment in AI will drive up the prices of chips, raw materials, and infrastructure, all of which are in short supply. “The investment boom is consuming capital, electricity, and other scarce resources,” stated Wei Li.
Profit vs. Risk
According to the BlackRock consensus forecast, earnings for companies in the MSCI Emerging Markets Index are expected to rise by more than 34% over the next 12 months, while those in the MSCI USA Index are expected to rise by approximately 20%. At the same time, emerging market stocks are trading at approximately 10 times forward earnings: this multiple is half that of the U.S., meaning a 50% discount, according to BlackRock’s calculations. “The figures support the case for a return to emerging-market stocks,” the strategists said.
Whether this recommendation proves valid depends on whether faster earnings growth and low valuations can outweigh the risks of rising borrowing costs, high oil prices, and geopolitical tensions, Bloomberg reports. BlackRock sees additional support in a weaker dollar and improved capital inflows: following recent sharp fluctuations, investors are reassessing their stance on emerging markets.
As interest rates rise, stronger justifications are needed for taking on risk, so earnings stability becomes more important, BlackRock emphasizes. “Emerging-market stocks are now another segment where earnings can meet these higher standards,” the investment giant asserts.
Context
On September 15, pressure on Asian stocks persisted as investors continued to assess calls from top executives in the AI industry to slow down the development of neural networks and a new round of tensions in the Persian Gulf, according to Reuters. A broad index of Asia-Pacific stocks, excluding Japan, fell 0.9%, while Japan’s Nikkei 225 and South Korea’s KOSPI recovered by midday after a morning decline, only to slip back into negative territory. Reuters notes mixed performance among Asian companies involved in the production of AI chips: shares of South Korea’s Samsung Electronics fell by nearly 1%, while those of Japan’s Kioxia rose by 0.5%.
This article was AI-translated and verified by a human editor
