Emerging market equities are changing. Technology, semiconductors and advanced manufacturing now play a much bigger role in the asset class, creating new opportunities while introducing new risks.
The biggest shift is coming from the rapid increase in spending on artificial intelligence infrastructure. Large technology companies are committing significant capital to build the computing capacity needed to support AI applications. Much of that spending is reaching emerging market companies that supply semiconductors, memory and other essential hardware.
This is changing the earnings profile of parts of the emerging market universe. The asset class has traditionally been linked to commodities, exports and domestic economic growth. Technology is now becoming another important source of corporate activity.
Semiconductors are at the centre of this change. AI applications require large amounts of computing power and specialised memory. Rising demand is therefore affecting production decisions across the semiconductor industry, including the allocation of capacity towards products such as high-bandwidth memory.
Companies exposed to the AI supply chain can benefit from higher demand, but the sustainability of the cycle depends on how technology spending develops. The scale of current investment also raises questions about the returns that technology companies will ultimately generate from their AI infrastructure.
For semiconductor suppliers, the more immediate consideration is whether spending continues to translate into higher revenues, earnings and cash flow. Companies that can convert strong demand into cash generation may be less dependent on changes in market sentiment.
Emerging markets include companies operating across technology, manufacturing and other knowledge-intensive industries. This broadens the range of businesses that can influence the performance and composition of the asset class.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
