Emerging markets are losing their status as a diversifier, as they go all-in for AI.
- TSMC is now 14.5% of the MSCI Emerging Market index, Samsung and SK Hynix another 7.8% and 6.6% respectively
- The Taiwanese and Korean markets now account for half the market capitalisation of the index
- There are other themes within emerging markets, but investors need to be sure active managers are giving them meaningful exposure
Emerging markets have been a natural source of diversification for investors looking to pivot away from developed markets. China and India were the largest markets, which presented differentiated exposure and access to a range of growth themes. However, the success of the AI semiconductor trade means that, increasingly, emerging markets are moving in lockstep with the US market.
Emerging markets are suffering even more of a concentration problem than developed markets. TSMC is now 14.5% of the MSCI Emerging Market index; Samsung and SK Hynix another 7.8% and 6.6% respectively. They have dwarfed previous leaders TenCent and Alibaba, who are just 2.7% and 2.1% of the index. The Taiwanese and Korean markets now account for half the market capitalisation of the index, replacing former leaders China and India.
The sector profile for emerging markets is now increasingly similar to that of the US market. The index has 43% in technology, and is largely dependent on the success or otherwise of the AI trade. It has sold off with every wobble on the AI trade and the Korean KOSPI index has started to look like a leveraged play on Nvidia.
There is an argument that this may be a better way to play the AI trade. Investors are getting purer exposure to the “picks and shovels” of the infrastructure build-out at a lower cost than for US markets. Samsung, for example, trades on a forward price to earnings ratio of just 4.8x and has a chunky dividend yield. However, it does not offer significant diversification.
It is not just a problem for the index, but for many active funds too. Every top-10 performer in the IA Global Emerging Markets sector over three years has TSMC, SK Hynix and Samsung in their top five holdings (source: Trustnet to 30 June 2026). It may have become too big to bet against.
That said, there are other themes within emerging markets that active investors can explore.
Joshua Lewin, head of Asia investment strategy at JP Morgan, says many countries are exposed to the “global fragmentation that is reshaping supply chains and intensifying the push for critical inputs and resources”.
He points out that Chile and Peru together account for nearly 40% of global copper production, while Brazil is emerging in nickel and rare earths, both critical for batteries and high-tech manufacturing. “Mexico strengthens the case further: U.S. Census Bureau data show it has overtaken China in exports of advanced technology products to the United States. In a world focused on supply security, those advantages are increasing the region’s strategic importance.”
This theme is difficult to get in developed markets, but investors will need to make sure that fund managers have meaningful exposure. Otherwise, there is a danger that emerging markets will end up simply being a leveraged play on the AI trade – with all the volatility that entails.
