Is AI a New Engine for Emerging-Market Equity Investors?

There’s more to artificial intelligence (AI) than the US tech giants. Equity investors can find overlooked opportunities in emerging-market companies.

Historically known for low-cost manufacturing, emerging markets have rapidly shifted focus to become active participants—and in some cases leaders—in the global technology revolution.

More than 10,000 tech companies have been founded in emerging markets since 2014, with Asia, Africa, Latin America and the Middle East all participating in this innovation boom. And while this growth spans the broad technology spectrum, emerging markets are playing an increasingly influential role in the delivery of AI-enabled technologies.

AI is set to change the way we live. From information processing to transportation, AI is having a profound effect on the way we interact, work and socialise. As a result, the global AI market is projected to grow from US$86.9 billion in 2022 to US$407.0 billion in 2027, a compound annual growth rate of more than 36%.¹ Amazon, Microsoft, Alphabet (Google) and Meta are forecast to spend hundreds of billions each year on building data centres to manage the rise of AI. US giant NVIDIA, which increased its profit by 769% in the last quarter of 2023, has become a symbol of this transformation, with its dominant AI chip technology. 

Finding Opportunities in Asian Semiconductors

While AI processing chips like NVIDIA’s tend to dominate the headlines, high-speed memory is also a critical component for AI servers. Two Korean companies, SK Hynix and Samsung Electronics, are competing with US-based Micron for control of this market. SK Hynix is currently the dominant market player in so-called high-bandwidth memory (HBM) chips, which are experiencing rapid demand growth (Display). In April, Hynix announced plans to invest close to US$4 billion to build an advanced fabrication and R&D facility in the US. Yet the company hasn’t received nearly as much attention from equity investors as some of the US-based AI stars.

NVIDIA itself is a chip designer, not a manufacturer. Someone else needs to etch those chips onto silicon wafers, and Taiwanese company Taiwan Semiconductor Manufacturing is currently the leading-edge semiconductor foundry. The company recorded US$69.3 billion in sales last year, controls almost 60% of the foundry market, and is the main supplier of processor chips for Apple and NVIDIA.

There’s More to AI than Chips

AI applications rely on advanced computer servers that can handle the massive computing power required for new AI-enabled applications. These complex servers require a multitude of high-performance components, in addition to the core processor and other semiconductors, like memory chips, and demand advanced assembly, cooling and power-supply solutions.

While chip-design companies like NVIDIA and applications giants like Microsoft dominate the market’s attention, other companies in the “middle” of the AI supply chain offer exposure to this rapidly growing market at more attractive valuations than the headline-grabbing US heavyweights. Many are based in emerging markets such as Korea and Taiwan. Using bottom-up research, investors can find technology hardware companies that are critical to the AI supply chain and have strong market positions and pricing power.

For example, King Yuan Electronics is a Taiwan-based company that provides testing and measurement services for the semiconductor back-end supply chain to companies like NVIDIA, which accounts for a growing portion of the company’s revenue. With such expensive processing chips, a robust testing process is critical to ensure that the final product works properly.

Unimicron, a Taiwanese technology company, is another critical player in the AI supply chain. The Taoyuan-based company makes Ajinomoto build-up film (ABF) substrate, a key component of the interconnection that joins advanced chips with circuit boards. Unimicron’s customers include NVIDIA and Apple and its materials go into central processing units and graphic units for computer servers and gaming consoles. Major semiconductor companies such as Intel and NVIDIA depend on ABF substrates to produce high-performance chips.

Capturing the Power of a Technology Revolution

Despite an impressive roster of technology companies, Asia appears to have been left behind in the global sector’s rerating over the last few years. While technology sector valuations in the US, Europe and Japan have risen substantially since 2019, in Asia ex-Japan, technology valuations have hardly budged (Display). We think investors could be potentially overlooking some attractive opportunities today.

To be sure, Asia’s technology industry has been volatile in recent years. Following the surge in technology demand during the Covid-19 pandemic, many Asian technology companies suffered from overcapacity and falling profitability; stock prices rose dramatically only to fall again rapidly in 2022. Companies are finally restoring a natural supply and demand pipeline, and a cyclical recovery is under way. On top of that, the AI-related infrastructure boom is now boosting the recovery.

The AI theme enjoys strong momentum. But we believe equity investors should search for more durable fundamentals. In particular, we see opportunities in companies that are inextricably linked to the supply chain and boast pricing and supply power backed by products that are essential ingredients for the high-profile AI players to succeed. In our view, a value-oriented approach, targeting companies with relatively cheap shares and underappreciated return potential, can be especially effective in the search for AI-driven opportunities in emerging markets.

By incorporating both fundamental and quantitative research, investors can identify quality businesses with these attributes that trade at more compelling valuations than the US technology giants. This approach may help investors capture the power of AI and find surprising return potential in the unsung, innovative emerging-market companies that are quietly enabling a global technology revolution.

1. Artificial Intelligence," MarketsandMarkets, https://www.marketsandmarkets.com/mega_trends/artificial_intelligence