Are Emerging Markets Now An AI Trade? TSMC, Samsung, SK Hynix Drive More Than Half The Gains

• TSMC, Samsung and SK Hynix now make up 26.7% of Morningstar’s EM benchmark.
• The three stocks drove roughly 57% of the index’s 30.3% gain over the past year.
• Analysts warn that extreme concentration could amplify losses if the AI trade reverses.

Emerging markets have become increasingly concentrated around a handful of semiconductor stocks, with Taiwan Semiconductor Manufacturing (TSMC), Samsung Electronics and SK Hynix now accounting for more than a quarter of a key benchmark as the AI boom reshapes returns.

The three stocks make up 26.7% of Morningstar’s Emerging Markets Target Market Exposure Index and were responsible for roughly 57% of its 30.3% gain over the past year, according to a new research report. 

When Samsung and SK Hynix fell sharply from late June, the three stocks were similarly responsible for a large share of the index’s 6.8% decline. Chip stocks have remained volatile over the past month, with a sharp drop on Monday.

On Stocktwits, retail sentiment was ‘bearish’ for SKHY and ‘extremely bearish’ for TSM on Monday.

Emerging Markets Concentration Risks

The concentration has grown rapidly as the stocks have surged on expectations of sustained AI-related demand. TSMC has jumped 96% over the past year, while Samsung has soared 258% and SK Hynix has rocketed 456%.

The net result is that investors seeking broad exposure to developing economies are increasingly being exposed to the same AI trade driving U.S. markets, according to Morningstar.

“Investors may think they are getting broad exposure to the developing world, but in practice, they are getting a very large allocation to Taiwan, China, South Korea, and India, with a huge semiconductor engine inside it,” Paul Choi, a non-US equity investment consultant at Callan, said. “That is a double layer of concentration.”

Morningstar research analyst Michael Born said the shift marks a sharp change from five years ago, when AI capital expenditure stocks were near the bottom of the market, and returns were driven largely by consumer electronics such as PCs, smartphones and gaming.

The Direxion Daily South Korea Bull 3X Shares (KORU), a three-times leveraged ETF tracking South Korea’s largest stocks, is up 357% in the past year and has seen increased interest from retail traders. On Stocktwits, message volume for KORU has increased by more than 1,000% in this period.

Non-AI Trades: Easiest Way To De-risk?

The report said the current concentration is also more extreme than previous emerging-market rallies. The top 10 stocks in the MSCI Emerging Markets Index accounted for 39% of the benchmark as of early June, compared with 28% during the 2020-21 China tech boom.

The iShares MSCI Emerging Markets ETF (EEM), the fund tracking the index, has gained 31% year to date. The iShares MSCI South Korea ETF (EWY) and iShares MSCI Hong Kong ETF (EWH), South Korea and Hong Kong stocks respectively, have gained 138% and 8.2% in the past 12 months.

Some investors are therefore looking beyond the AI trade. Matthews Asia executive chairman Mark Headley was quoted in the Morningstar report as saying, “It’s time to dampen concentration risk,” pointing to cheaper Chinese financials and opportunities across ASEAN, India, South Korea and other overlooked parts of emerging markets.

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