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Wall Street seeks AI leaders outside of Nvidia in developing markets

Some of the largest investment firms globally are seeking the next generation of artificial intelligence (AI) leaders beyond the borders of the United States. Amidst a surge in interest in AI technologies that has driven a significant increase in the value of companies like Nvidia and semiconductor manufacturers in the U.S., investors are turning their attention to emerging markets for better value and a wider array of investment opportunities.

Goldman Sachs Group’s asset management arm is specifically targeting investments in companies involved in manufacturing AI supply-chain components, such as cooling systems and power supplies. JPMorgan Asset Management is focusing on traditional electronics manufacturers that are transitioning into AI leaders, while Morgan Stanley’s investment managers are placing their bets on companies in non-tech sectors where AI is reshaping business models.

“We see AI as a growth driver in emerging markets,” said Jitania Kandhari, deputy chief investment officer at Morgan Stanley Investment Management. “While we have previously invested in direct AI beneficiaries like semiconductors, going forward it will be key to look for companies in different industries that are adopting AI to enhance earnings.”

The rebound in emerging markets this year, valued at $1.9 trillion, has been led by AI stocks, particularly in countries like Taiwan and South Korea. However, despite this surge, most AI stocks in emerging markets still offer better value compared to their U.S. counterparts. For instance, while Nvidia trades at 35 times its projected earnings, Asian AI giants typically have valuations between 12 and 19 times.

Moreover, emerging markets offer faster growth opportunities. Analysts project a 61% increase in earnings for technology companies in emerging markets, compared to a 20% rise for their U.S. counterparts.

The success stories in emerging markets so far include companies like TSMC and Hon Hai Precision Industry, which were already technology leaders before the AI rally began. These companies, along with MediaTek, are among the top holdings of various funds focusing on Taiwanese equities and emerging markets.

However, the buzz around AI investments is expanding, with more investors pouring money into companies that are investing in AI technologies. For example, Korea’s Hanmi Semiconductor and Vietnam’s IT services provider FPT have seen significant gains this year, attracting foreign investment and outperforming their peers.

Additionally, established businesses in emerging markets are also attracting investor interest as they signal their entry into the AI space. For instance, Saudi Arabia has become a hub for Chinese AI ventures, while India’s Reliance Industries has developed AI models with capabilities in multiple languages, contributing to the digital transformation in the country.

Despite the potential rewards, investing in emerging market AI stocks comes with risks. These markets are closely tied to the U.S., so any AI-related selloff in the U.S. could have ripple effects worldwide. Moreover, if stock market gains broaden out, AI names may lag behind other sectors.

Nevertheless, investors are increasingly exploring opportunities in emerging markets as alternatives to over-extended U.S. tech stocks. AI is seen as an under-appreciated driver of growth in these markets, offering significant potential for returns in the future.

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