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Have Emerging Markets become an AI trade? · UBS Trending

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  Three companies now carry more weight in emerging markets
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  than the countries of India, Brazil,
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  South Africa and Mexico combined.
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  Those companies happened to be semiconductor
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  giants in the countries Taiwan and Korea.
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  So what's driving this incredible rally
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  and the question that we all want to know.
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  Is it sustainable?
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  We're going to talk about that in a whole lot more right now.
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  On UBS Trending.
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  Hi, everybody.
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  And thank you for joining me.
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  I'm Anthony Pastore, your host for UBS Trending.
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  And in the studio
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  with me again is Alejo Czerwonko,
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  the CIO for Emerging Markets here at UBS.
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  Alejo, good to have you back.
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  Thank you for having me.
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  Despite World Cup fever, which we're all talking about a lot,
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  the final games are coming up soon.
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  We have to go to the emerging markets landscape now, because
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  in prepping for today, you're talking about Taiwan and Korea.
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  And there have been incredible gains.
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  And there are equity markets.
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  And I mentioned in the beginning more than three companies
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  are besting multiple countries.
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  That's right.
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  What's going on there?
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  Why why are we seeing such incredible outperformance
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  specifically in these two countries?
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  All right. Let me take a step back.
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  Emerging markets at large have been outperforming
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  the S&P 500 for 18 months now.
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  Yes.
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  This year it's been mostly about Korea and Taiwan.
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  These countries are up 80% in US
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  dollars 60% in US dollars respectively.
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  Tremendous rally.
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  But if you incorporate support
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  from Latin America in the last 18 months,
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  you also see very significant returns 75% up.
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  So I think the emerging markets are a story of technology,
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  mostly North Asia and commodities, mostly
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  Latin America, specifically to Korea and Taiwan.
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  You are referring to countries that have been focusing
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  on building the best chips in the planet for 50 years.
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  Takes a lot of work.
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  You get to develop an ecosystem of suppliers,
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  the knowhow that today, quite frankly, it is irreplaceable.
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  Yeah.
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  When you look at Latin America,
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  before we go back to Taiwan and Korea,
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  what are some of the countries that are performing well?
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  It's been that broad based, really.
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  Brazil, in the last 18 months, solid performance.
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  Mexico, accompanying Chile, Colombia, Peru, Argentina,
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  all of them well into the double digit territory.
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  So it's been broad based testing taking into account
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  depressed valuations in Latin America and a fair amount of
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  a commodity exposure. Right?
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  Right, exactly.
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  Let's go back to Asia then,
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  because it looks like
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  Taiwan and Korea have actually overtaken China
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  as the largest equity markets
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  in the emerging world,
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  which is almost unfathomable
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  to think,
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  unfathomable to think about,
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  because we know in China there are more billionaires per capita
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  than anywhere in the world, or certainly rivaling the U.S.
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  and other, you know, like developed, economies.
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  What is that part of the story?
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  Tell us about how investors think about the future
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  of growth, especially in that region.
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  And I know we're talking about semiconductors,
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  and of course, the increased usage and implementation of AI,
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  kind of helping to tell this story
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  and making the story really feasible.
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  Yes.
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  For these countries,
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  you're spot on, maybe to put things into context today.
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  Korea and Taiwan together make up almost 50%
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  of emerging market market capitalization.
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  Jagan. That's incredible.
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  Overtaking both of them, each of them China.
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  And as you highlighted in the intro, I think even more mind
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  boggling is the fact that three chip companies from Korea
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  and Taiwan today have a larger weight in emerging markets than
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  India, Mexico,
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  Brazil, South Africa, the UAE and Saudi Arabia combined.
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  Right? It's wild.
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  This is how much concentration we're talking about these days.
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  In addition, volatility has picked up, focusing on Korea.
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  There's been,
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  quite some use of leveraged ETFs
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  by retail investors to express investment views.
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  And this,
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  of course supercharges
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  the upside and potentially also the downside.
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  So volatility in Korea to some extent
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  Taiwan has extended to the broader emerging markets.
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  So I would say Anthony the emerging market ecosystem is evolving.
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  You get to be mindful of concentration and in some way,
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  you know, just remember remember Warren Buffett's mantra,
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  be greedy when others are fearful, be fearful
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  when others are greedy
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  and this is not necessarily the time to aggressively chase
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  the leaders.
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  It is time to maintain exposure.
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  But diversity across other countries.
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  Okay, but I have to ask this question.
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  I'd be remiss if I didn't.
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  So looking at the numbers again, Taiwan's equity markets up
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  about 60%, Korea maybe more than 75%.
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  Just for context, if you look at the average
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  gains in the S&P 500 here in the US
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  for the last 50 to 60 years, it's about 8 to 10% a year
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  on average. Yes. Right.
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  So comparing that to these numbers,
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  it's a it's a massive difference.
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  So 60 and 75% for those that may not know
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  those are big huge gains.
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  I think everybody understands that.
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  I think they can. Right.
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  Contextually it's even more significant. Right.
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  But here's the question then are we in danger
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  of some kind of bubble territory, are valuations correct.
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  As far as you can see, when you're looking at,
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  you know, everything from the beginning to the end or,
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  you know, and also our investors may be in danger
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  of getting ahead of themselves,
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  given even the volatility that you were just talking about.
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  Yes.
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  Let's maybe get some facts straight, because a lot of the rally
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  can be justified by fundamentals.
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  These companies are posting incredibly strong earnings.
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  Right. So when you look at the price
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  divided by the
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  earnings things are not crazy right.
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  There's been significant moves. Yes.
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  I think you could argue
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  maybe markets are riding a little bit too far too fast.
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  Let me go back to Warren
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  Buffett's be fearful when others are greedy.
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  I sympathize with that.
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  But there is fundamental value behind
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  what's going on in North Asia.
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  Incredibly innovative, innovative markets.
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  It takes 50 years to build something like this.
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  And the harsh reality, Anthony, is there's no alternative.
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  You cannot replicate five decades of deep focus
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  work to be at the cutting edge
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  of semiconductor manufacturing in Korea and Taiwan.
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  Right.
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  So I think you should be able to hold two maybe conflicting
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  thoughts in the head at the same time.
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  Incredible, markets
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  very solid fundamentals, maybe a bit running ahead of themselves.
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  So what do you do? You maintain some exposure yet?
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  Do you diversify,
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  minimizing FOMO, minimizing chasing performance.
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  Right.
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  What I
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  what I appreciate you saying
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  is that you're looking at the fundamentals
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  and they are clearly there.
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  These are not we're not talking about meme stocks.
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  It's not all fluff.
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  Yes. Right.
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  And it's not just technicals either.
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  Which technicals have a place in any portfolio.
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  But you need the fundamentals as a baseline
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  to make sure that you're actually investing in something real
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  that has a store of value.
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  That's correct. They're still solid from the.
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  That's right okay.
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  So given all that which by the way,
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  thank you for for confirming that what should investors do.
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  So obviously we talk every month here
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  about how investors should diversify portfolios
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  putting some emerging markets in there.
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  Given what
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  we are seeing, particularly with Taiwan and Korea
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  and even what you mentioned about
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  some of the things that are happening in Latin America,
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  where should investors
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  be adding exposure to their portfolios
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  if they don't already have it?
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  Yes, I would say,
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  look at our transformational innovation opportunities.
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  That's a good way to play many of the dynamics
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  behind Korea and Taiwan.
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  If you believe in AI, as we do, you should build a portfolio
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  that is dynamic, that,
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  adapts to the opportunities at different points in time.
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  And that has a strong footing in the US,
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  but also contemplates opportunities outside of the US.
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  That's what we're doing with our trios artificial
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  intelligence, power and resources and longevity.
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  Yeah, right.
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  You will get some North Asia exposure through this
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  transformational innovation opportunities.
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  Approach.
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  In addition,
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  we think emerging markets can continue to perform earnings.
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  Are there.
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  Valuations are not extremely not not demanding.
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  And you should have, of course, Korean and Taiwan.
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  They want but contemplate Latin America as we emphasized before
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  and some of the laggards from 2026
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  India is down 10% this year in US dollars.
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  China is down 10% this year.
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  And the US dollar is clearly not doing very well.
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  We think there's some value brewing in the laggards as well.
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  Okay Alejo. Thank you.
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  You know, it's funny because just a few years ago
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  when AI wasn't in the conversation
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  and a real part of our daily lives,
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  there was talk that cell phones, which was a bigger part
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  of the semiconductor business for the decade before,
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  had maybe started to reach a bit of a peak.
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  And there was concern about what would happen
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  with the semiconductor industry.
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  But then AI comes into play
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  and now we're seeing stories like this.
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  It's it's hard to get enough of them. Exactly.
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  It's like, yeah, they just can't get them out fast enough.
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  I like oh thank you so much. Any good stuff. Great story.
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  Thanks for sharing it with us. Great.
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  Good to see you and thank you all for joining us.
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  There's a lot more information on our website
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  which is our insights website ubs.com/views.
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  Great content coming out of our chief investment office.
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  Plus you can follow us on social media.
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  We're on LinkedIn and Facebook.
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  Plus you can follow us on Instagram.
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  The studio has its own dedicated channel there.
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  Follow us at UBS. Trending.
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  Lots of content there for you.
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  And as always,
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  if you have any questions about what
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  Alejo and I spoke about today,
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  please make sure you are continuing this conversation
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  with your financial advisor.
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  Until next time, I'm Anthony Pastore.
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  We wish you a great rest of your day
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  and remember to keep your eyes on what's trending.
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  We'll see you soon.