The Great Comeback of Emerging Markets?

Driven by artificial intelligence, the MSCI Emerging Markets index has been significantly outperforming Wall Street since the start of the year. However, behind this rally lies a more nuanced reality: the index is highly concentrated and dependent on a few Asian semiconductor giants.

Long overshadowed by Wall Street, this year emerging markets are returning to favor amongst investors. While all eyes were on American tech giants, the MSCI Emerging Markets has quietly delivered one of the year's strongest performances, rising 21% since January, compared to 9% for the S&P 500.

source: MarketScreener

However, this comeback is fueled by specific drivers, with Asia is at the forefront. Here, South Korea is soaring with the KOSPI up 85%, while Taiwan has risen by 46%. Both these markets are being propelled by the explosion of artificial intelligence.

An Index Dominated by Asia

The MSCI Emerging Markets includes 1,204 companies from 24 countries, ranging from China and Brazil to India, Saudi Arabia and Poland. In practice, however, the index is largely dominated by Asia. Taiwan, China, South Korea, and India alone account for nearly 80% of its weighting.

source: MSCI

The term "emerging" is becoming increasingly debatable. Certain economies within the index, such as Taiwan, South Korea and the United Arab Emirates, are now more like developed economies rather than emerging markets strictu sensu, with wealth levels similar to those of many European countries like Spain and Italy.

Chips Set Emerging Markets Ablaze

The real engine of the MSCI Emerging Markets is semiconductors. Three companies alone represent a quarter of the index: Samsung Electronics, SK Hynix, and TSMC.

source: MSCI

In other words, a significant share of emerging market performance now rests on a few giants that are exposed to AI. Samsung and SK Hynix are benefiting from the surge in demand for High Bandwidth Memory (HBM) chips, while TSMC profits from manufacturing the advanced processors used by Nvidia, AMD, and Apple.

Stockmarket performances have been spectacular. This year, Samsung has gained 130%, SK Hynix over 160%, and TSMC about 40%.

Here lies the paradox. The "emerging" index is now heavily dependent on ultra-advanced technology groups, which are sometimes more "sophisticated" than many Western companies.

The case of Samsung perfectly illustrates this transformation. The Korean group was long associated with smartphones, althiough it now makes most of its profit from semiconductors. Its chip division represented 94% of profits in Q1.

Samsung could even become the world's second-largest group in terms of earnings by 2026, trailing only Nvidia, with $186bn expected. Its EBITDA margin is expected to rise from 26% in 2025 to 59% in 2026.

An Illusion of Diversification

The MSCI Emerging Markets thus provides an illusion of broad geographical diversification. However, by purchasing this index, investors are no longer truly betting on the growth of emerging nations, but rather on the same technological dynamics already driving Wall Street, with added local risks.

This extreme concentration on Asian semiconductors exposes the index to geopolitical tensions between Washington and Beijing, particularly regarding Taiwan and US restrictions on advanced technologies.

Internal frictions are also mounting. At Samsung, unions are already demanding a better redistribution of profits, while several countries are considering higher taxes on AI-related "super-profits." The great comeback of emerging markets is real, but it increasingly resembles a bet on the future of global tech.