From commodities to compute, Robert James, portfolio manager, TT International’s emerging markets equity strategies, shares his insights on emerging markets.
There is a persistent mental model of emerging market equities that endures in the minds of many investors, despite having been substantially obsolete for well over a decade. Viewed through this outdated lens, EM is a play on commodities, demographics and low-cost export manufacturing.
It is a world of iron ore miners, state-owned banks, oil majors, and consumer companies serving the newly aspirational middle classes of the Global South. Although elements of this paradigm remain true, it is woefully inadequate in capturing the reality of the asset class today.
A profound transformation has quietly reshaped emerging markets over the past fifteen years. This shift was driven by the compounding of several powerful forces: the secular decline in commodity prices after 2011, the explosive growth of Asian technology platforms, and the increasing concentration of the global semiconductor supply chain around a small number of Taiwanese and Korean champions.
Consequently, the combined weight of IT and Communication Services in the MSCI Emerging Markets index is now broadly on par with the S&P 500, and far greater than in European or global indices. This places emerging markets at the epicentre of the AI boom.
America’s buildout is Asia’s boom
US hyperscalers are racing to secure AI supremacy through massive infrastructure investment. But the simple reality is that the country lacks the manufacturing capacity to supply itself. Consequently, Asia has become the primary transmission mechanism for this capex boom.
Every dollar of hyperscaler capex generates up to a dollar of imports in semiconductors, equipment and components. Cash flow is therefore transferring from US hyperscalers to Asian technology manufacturers on an unprecedented scale.
Taiwan and Korea are the main beneficiaries. Against a backdrop where hyperscaler capex is expected to approach $800bn in 2026, the combined free cash flow generation of just three semiconductor companies – Samsung, SK Hynix and TSMC – is forecast to reach $300bn this year. Of course, the opportunity set extends far beyond these three behemoths. Taiwan and Korea are expected to generate current account surpluses of 18% and 8% respectively this year, highlighting the breadth of beneficiaries across the wider technology supply chain.
AI’s second wave: smarter models, stronger economics
In this context, we have maintained a positive view on the technology cycle and rapidly rising demand for compute, expressed through our longstanding overweight in Asian tech hardware. However, given the vast amount of capital being committed to a nascent and still unpredictable technology, it is important to continually assess the sustainability of AI-related investment, appropriately discounting the obsolescence risk inherent to the sector.
Recent developments give us cause for continued optimism. The advent of agentic AI is an important evolution that strengthens our conviction to underwrite this investment cycle for longer. Earlier generations of AI models largely operated within a question-and-response ‘chatbot’ framework. By contrast, agentic models are iterative, collaborative and self-correcting.
They are capable of running multiple protracted workflows that are far more compute-intensive than the single-task copilots they supersede. Consequently, token usage – effectively the volume of computation being performed – is rising exponentially. Goldman Sachs estimates that agentic AI could drive a 24-fold increase in current token consumption by 2030, with enterprise agents powering the next leg of growth and lifting token consumption 55X by 2040.
Whilst surging demand is important, token economics ultimately need to stack up if the AI value chain is to be sustainable. Here again there have been encouraging developments. Inference costs per token have declined as AI accelerator technology evolves from Nvidia GPUs towards increasingly sophisticated Application-Specific Integrated Circuit architectures such as Google TPUs and AWS Trainium. Annualised cost per token has fallen 60-70%, while token pricing has moved from persistent declines towards relative stability and, in some areas, increasing pricing power.
This apparent inflection in unit economics will be key to answering the defining question of this AI cycle: what is the return on investment in compute – for hyperscalers, frontier labs, and their end customers?
Differentiation is key
Hyperscaler capex is central to the investment case for much of the Asian technology hardware supply chain. It is well understood that these remarkable levels of investment – expected to reach $1.1 trillion in 2027 – are causing substantial compression in free cash flow margins for US hyperscalers.
We therefore believe it is increasingly important to differentiate between the quality and sustainability of different capex providers, acknowledging the circularity of some of the funding agreements between large players.
Not every dollar of investment spending is equal. Internally financed capex backed by robust free cash flow generation is materially more durable than investment dependent on debt or off-balance-sheet financing. In this context, we have greater conviction in supply chains aligned with hyperscalers possessing stronger balance sheets and more resilient business models.
The market narrative around AI remains overwhelmingly US-centric, yet much of the associated value is accruing elsewhere. For investors seeking diversified exposure to one of the defining themes of our era, emerging market equities offer one of the most compelling opportunity sets.
They also provide additional balance in the form of many ‘old economy’ businesses characterised by low obsolescence risk and structural scarcity value, particularly within the metals and mining, heavy industry and construction equipment sectors.
“As energy demand, electrification and industrial investment continue to accelerate globally, these sectors remain critically important enablers of the broader capex cycle.”
Robert James, portfolio manager, TT International
