AI Shift: Mukesh Ambani Led Reliance Industries Shines As Fund Managers Extend Focus Beyond US

In the midst of the global frenzy surrounding artificial intelligence (AI), some of the world's largest money managers are diverting their attention away from the United States, in search of the next big AI success stories within emerging markets. With Nvidia Corp. experiencing a three-fold surge and a 50% jump in a key US index for semiconductor manufacturers in less than a year, investors are seeking better value and a broader range of investment opportunities beyond the traditional tech hubs.

Goldman Sachs Group Inc.'s asset management arm is honing in on stakes in manufacturers of AI supply-chain components, such as cooling systems and power supplies. Meanwhile, JPMorgan Asset Management is favouring traditional electronics manufacturers evolving into AI leaders, and investment managers at Morgan Stanley are placing their bets on companies in non-tech sectors where AI is revolutionizing business models.

Jitania Kandhari, Deputy Chief Investment Officer at Morgan Stanley Investment Management, emphasized the significance of AI as a growth driver in emerging markets, highlighting the importance of identifying companies across different industries adopting AI to enhance earnings.

AI stocks have been at the forefront of a $1.9 trillion rebound in emerging markets this year, with Taiwanese and South Korean chip companies like Taiwan Semiconductor Manufacturing Co and SK Hynix Inc contributing to 90% of the gains, according to Bloomberg data. Despite this surge, most emerging-market AI stocks still offer better value than their US counterparts, with Asian AI giants typically valued between 12 and 19 times projected earnings, compared to Nvidia's 35 times.

Moreover, emerging markets promise faster growth potential. Analysts foresee a 61% increase in earnings for emerging-market technology companies as a whole, outpacing the 20% rise projected for US peers, according to Bloomberg data.

Companies that were already leaders in technology prior to the AI boom, such as TSMC and Hon Hai Precision Industry Co., have emerged as stars. These companies, along with MediaTek Inc., a chipmaker, are featured in various funds and ETFs, showcasing strong performance and investor confidence.

Anuj Arora, Head of Emerging Markets and Asia Pacific Equities at JPMorgan Asset Management, noted that tech companies historically serving as suppliers to major players may evolve into significant players themselves. Their early adoption of AI technology positions them far ahead of competitors in leveraging new advancements.

The growing buzz around emerging markets is evident as more investors pour money into the sector. For instance, Korea's Hanmi Semiconductor Co., majority-owned by billionaire Kwak Dong Shin's family, has surged approximately 120% this year, leading gains among members of the MSCI Emerging Markets Index. Its recent increase in foreign ownership, as reported by Bloomberg data, indicates rising investor interest.

Emerging markets are rapidly embracing the potential of artificial intelligence (AI), drawing attention from global investors seeking lucrative opportunities beyond traditional tech hubs. With Vietnam's IT services provider FPT Corp surging almost 20% this year and established businesses signaling their move into AI, emerging markets are emerging as hotbeds for AI innovation and investment.

The rise of AI-focused investments is evident in the performance of the Ashmore EM Frontier Equity Fund, which has been propelled to the top of the actively managed emerging market funds in the US, largely due to the success of FPT Corp.

Furthermore, exchange-traded funds (ETFs) with a focus on emerging markets are experiencing significant inflows, with more than half of the investments this year pouring into the iShares MSCI EM ex-China ETF. This ETF's top 10 holdings include companies actively investing in AI, underlining the growing importance of AI-related ventures in emerging market portfolios.

The shift towards AI is not confined to specific regions, as established businesses in diverse markets are also signaling their entry into the AI landscape. In Saudi Arabia, a burgeoning hub for Chinese AI ventures, partnerships such as Alibaba Group Holding Ltd's collaboration with Saudi Telecom C are gaining traction.

Similarly, India's Reliance Industries Ltd., led by billionaire Mukesh Ambani, is making significant strides in AI development. The petroleum giant has developed a chatGPT-style model with capabilities in 22 Indian languages, positioning itself at the forefront of India's digital transformation.

Luke Barrs, Global Head of Fundamental Equity Client Portfolio Management at Goldman Sachs, emphasized the emergence of a "national champions" mindset in certain markets, where countries are prioritizing the nurturing of homegrown AI companies to become future leaders. This trend underscores the strategic importance of AI in shaping the economic landscape of emerging markets.

However, investing in emerging markets comes with its own set of risks. These markets are closely tied to the US, meaning that an AI selloff in the US could have ripple effects worldwide. Additionally, if stock-market gains diversify across sectors, AI names may lag behind, posing challenges for investors.

Despite these risks, investors are increasingly turning to emerging markets as alternatives to US tech stocks that may have become overextended. Jitania Kandhari, Deputy Chief Investment Officer at Morgan Stanley Investment Management, highlighted the growing recognition of AI as an underappreciated driver of future growth in emerging markets. She emphasized the abundance of untapped opportunities and the potential for significant returns.

*Inputs from ET*