Emerging markets offer AI exposure beyond hyperscalers: experts

Each month at BPM, we offer a slate of articles and content pieces that go deep on a particular topic. This month, we're focusing on Emerging Markets and the sectors and countries within the asset class. 

Emerging markets are back at the front and centre of institutional portfolios. After years of being sidelined by North American investors fixated on the so-called “Magnificent Seven”, the drivers behind EM's equities rally are raising questions about what comes next.

After all, Shibo Gu, portfolio manager at Forstrong Asset Manager, says EM equities have been one of the best-performing asset classes year to date in 2026, extending a rally that started in 2025 on the back of AI demand and hyperscaler spending.

What’s driving the emerging market rally

The gains have come in waves. Taiwan and parts of China moved early, Korea turned around after a rough two-year stretch, while Latin America has ridden commodity strength. The common thread is that investors focused on US mega-caps missed the breadth of the AI supply chain.

"When we talk about AI, everyone is focusing on the hyperscalers, focusing on a Magnificent Seven in the US, right? No one really puts a lot of emphasis on emerging markets, but I think more investors are starting to realize that emerging markets are a great place and a very important part in this AI supply chain,” said Gu. “We do think this is the market that after years of depression, after years of like totally being neglected in North American investor base, could probably garner more attention.”

Christopher Knapp, managing director and portfolio manager of Emerging Markets Equities at Jarislowsky Fraser Institutional, acknowledges that EM technology's direct leverage to AI themes - semiconductors, memory and the data centre buildout - has driven index returns for good reason. But he underscored how investors are seeing rising speculative behavior in the sector and assumptions on growth and profitability that look increasingly optimistic at an aggregate level. The more durable opportunities, he argues, are in sectors that aren't changing as quickly and don't carry the same cyclical risk.

"Some of the areas that seem less exciting today are actually where we see a high probability of earning attractive, durable long-term returns without the same valuation risk or business cyclicality that is beginning to appear in parts of the information technology space," he said in a statement, pointing to EM financials as consistent value creators, and to internet platforms whose deratings have opened up what he considers compelling long-term entry points.

"We believe many of these businesses are long-term winners and potential beneficiaries of AI adoption," he added. "The market is underestimating the long-term growth and return potential of these businesses and providing exceptionally attractive entry points.”

Gu underscored that EM has traditionally functioned as a high-beta play on global growth and trade and that pattern still holds. But the AI wave that began in 2023–24 has introduced a K-shaped dynamic within the asset class, like what played out in North America.

While Knapp acknowledges the AI hardware trade has been the engine behind EM's outperformance, with companies across the semiconductor and computing power supply chain seeing a sharp inflection in profitability, he's also wary of how concentrated the rally has become.

“It underscores the opportunity, but it also introduces risks, as the broader EM index has become more leveraged to a specific technology and AI-related theme,” he noted in a statement.

Away from that theme, he sees a broad set of businesses that have been overlooked as capital has chased returns in the Technology sector.

"We see attractive value in many consumer-facing businesses in the discretionary area and in internet businesses with strong moats, high barriers to entry, excellent returns on capital, and strong growth prospects," he said, noting parts of the financial sector in countries with strong long-term growth fundamentals that round out his opportunity set.

Why allocators need to look past broad exposure

Gu acknowledged the divergence between the winners and the laggards has become wide enough that treating EM as a single risk-on bet misses the picture. Allocators need to look past broad index exposure and understand the specific country and sector risks they're taking on.

According to Gu, metals and mining in Latin America is being overlooked. While it's a small part of the overall EM index, he believes the setup is compelling, noting years of supply constraints from ESG pressures, permitting bottlenecks and environmental regulation have left the commodity sector unable to keep pace with demand driven by AI infrastructure and data centre buildouts.

"There's a very huge supply-demand mismatch now because of the very strong demand side from AI, from data center build out," he said, noting how copper and gold ran up sharply in the second half of 2025 before pulling back over the past three months.

 "We do think this is kind of like a viable dip and viable opportunity rather than like something like a bear market," he added.

A different playbook across sectors and countries

Additionally, Gu emphasized EM sector selection requires a different playbook than what works in North America, noting how most EM country indexes are dominated by one or two industries, often more concentrated than even Canada's.

Technology makes up north of 85 per cent of Taiwan's MSCI index, with TSMC alone at more than half. Korea's IT weighting runs at about 75 per cent, overwhelmingly Samsung, noted Gu.

Meanwhile, Latin America has virtually no technology exposure, leaning instead on financials and metals and mining. Buying a country in EM is, in practice, buying a concentrated sector bet, he argues, and each country is positioned differently enough that broad-based exposure doesn't capture the nuances.

Ultimately, Gu acknowledges that EM's inherent volatility has been heightened by the tech hardware rally, emphasizing any pullback in Taiwan or Korea could produce double-digit drawdowns in a single day.

The flip side, he argues, is that EM offers Canadian institutional investors a distinct return driver away from domestic energy and financials and a way to gain AI exposure outside the crowded hyperscaler trade. Gu believes Korea's 100 per cent year-to-date gain and 200-plus per cent return over 18 months illustrate the potential.

The risk that would prompt Gu to pull back is a mid-term one - hardware manufacturers ramping supply aggressively enough to create overcapacity.

"That risk is very large enough and it's not easy to mitigate it," he said.