Tech Euphoria Teaches Emerging Markets A Painful Lesson
Carlos von Hardenberg, a seasoned emerging market fund manager, found it difficult to pique investors’ interest in anything other than the booming U.S. tech companies that seemed to be the subject of nearly every bank research note a few years ago. No more.
As of this year, the global EM stock indexes (.MSCIEF) open new tabs that have emerged from the shadow of Wall Street, and the AI boom has ignited a rocket beneath the South Korean and Taiwanese companies that dominate the production of high-tech memory chips.
Hardenberg, who co-founded MCP Emerging Markets in 2018 with pioneering EM bull Mark Mobius, stated, “Investors would say they were only interested in the U.S. and Magnificent Seven, and this is all you need because they were doing so well.”
“Now this year, everything turned the other way around.”
However, taking advantage of the AI growth has come at a price. Extreme volatility has been prevalent since late June, almost as if investors suddenly experienced altitude sickness.
Due to a combination of worries and restrictions, the value of South Korea‘s KOSPI index (.KS11), which had doubled due to even greater increases for Samsung Electronics (005930.KS) and SK Hynix (000660.KS), dropped 40% in just six weeks. The largest business in the EM stock universe, Taiwan’s TSMC (2330.TW), opened a new tab and dropped over 14%.
It caused volatility in South Korea (.KSVKOSPI), opened a new tab, and even exceeded the COVID pandemic’s peaks for MSCI’s $1.8 trillion EM index, which comprises over 1,175 businesses from 24 different countries.
Only because it can be challenging for foreign investors to trade their currencies does the MSCI continue to classify Korea and Taiwan as EMs.
According to Ashley Lester, head of research at MSCI, “we’re seeing that emerging markets, which people used to look to as a source of diversification, are no longer really a source of diversification due to the emergence and importance of these extremely large AI-related, particularly AI hardware-related companies.”