Money managers seek shelter from AI risks in emerging markets. What are they buying?

Money managers are shifting out of overheated AI stocks and into emerging-market equities. High dividend yields and rock-bottom valuations are drawing them in. By one measure, emerging-market stocks are cheaper than at any point since the global financial crisis 18 years ago, Bloomberg reports.

“Many non-tech sectors and markets in EM offer stronger long-term growth than their US counterparts, at significantly more attractive multiples,” argues Maxence Visseau, chief investment officer of Dubai-based Arkevium Capital.

Sat Duhra, a portfolio manager at Janus Henderson Investors, began adding to his holdings of dividend stocks in China and Hong Kong late last week, citing “improving payout discipline.” Duhra is still reluctant to rebuild his exposure to tech stocks.

“Just hogging three or four names and being really concentrated actually doesn’t work over the long term,” Duhra said. “There’s a whole bunch of other areas outside of AI that have worked really well, and that’s where we positioned.”

Robert Naess, a portfolio manager at Nordea Investment Management who helps oversee $1.1 billion in emerging-market assets, is shifting into telecom and consumer stocks, including Chinese sportswear maker Anta Sports and Taiwanese computer hardware manufacturer Getac Holdings.

“I believe AI will have a major impact on the global economy, but that does not necessarily make AI stocks the best investments going forward,” Naess reckons.

Last week’s flight from AI stocks also sent billions of dollars into India, Bloomberg reports. India’s NSE Nifty 50 Index rose 2% on Friday, capping its best week since 2021.

“The no-brainer anti-AI trade should be India,” argues Bing Yuan, a fund manager at Edmond de Rothschild. She recently began adding to her holdings in India, though she remains cautious about the country’s dominant IT services sector.

Alongside her Indian holdings, Yuan owns shares in Chinese healthcare firms BeOne Medicines and WuXi Biologics. The stocks are up 37% and 58%, respectively, this year.

South American stocks are also starting to draw buyers after a selloff sparked by the surprise reelection of Brazilian President Luiz Inácio Lula da Silva.

“Latin America is another region that presents minimal AI exposure, deep value, and commodities,” said Malcolm Dorson, a senior portfolio manager at Global X Management, which has $93 billion in assets under management. “Brazil’s volatility has left it with an extremely low bar for outperformance.” He is adding to his holdings of copper and gold miners, utilities, and banks across the region.

Other fund managers point to South American utilities, Chinese and Taiwanese consumer-goods manufacturers, and financial companies in Eastern and Central Europe as attractive alternatives to stocks with exposure to AI, Bloomberg reports.

The benchmark MSCI Emerging Markets Index trades at about 8 times forecast earnings for the next 12 months, less than half the S&P 500’s multiple, while offering about twice the dividend yield, according to Bloomberg data. The MSCI index’s low multiple partly reflects how quickly analysts are raising earnings estimates for the AI giants in the index, Bloomberg reports. Chipmakers SK hynix, Samsung Electronics, and Taiwan Semiconductor Manufacturing together account for nearly 30% of the index.

The selloff in AI stocks, fueled by concerns about the sector’s outlook, also hit emerging markets. A drop in chip stocks dragged the MSCI Emerging Markets Index to a seven-month low last week before it recovered some of its losses. Still, the divergence in returns showed that parts of emerging markets were insulated from the fallout of the AI boom, Bloomberg writes. About 30% of the stocks in the MSCI index rose on Friday, twice the share of S&P 500 stocks that finished higher a day earlier, when the U.S. index tumbled 4.4%.