By Giulietta Talevi. First published in Financial Mail, 7 October 2026 as Emerging markets for the win
Emerging market stocks – such as Taiwan’s Taiwan Semiconductor Manufacturing Company and South Korea’s SK Hynix – have had a cracker 2026 as they benefit from the enormous amounts of money spent by US tech firms on AI. The FM asked Ninety One portfolio manager Varun Laijawalla how emerging markets should fit into South African portfolios.
Q With South Africa’s Regulation 28 rules and the amount of money we are forced to channel into the home market, are we all by default emerging market investors?
It’s a crucial question. The definition of emerging markets is very broad; there are 24 markets that sit within the MSCI definition all the way from Chile to South Africa to the Philippines, and those three countries have very little in common with each other. About 50% of the JSE comes from two exposures: resources and financials.
If you think about the MSCI emerging market benchmark, about 45% of the exposure comes from technology. Historically, if we roll the clock back 20 years resources was a much bigger part of the emerging market world, and therefore you could have asked: well, am I not just doubling up on my resource exposure as a South African investor by buying emerging markets? But that was 20 years ago. Actually, the two indices look very different now. If you put some numbers around it, there’s no correlation. So I think there is a clear case to diversify.
Q Does China still dominate the MSCI emerging markets index?
It’s changed quite a lot. Back in 2018, 2019, China was approaching 40% of the benchmark. It’s now closer to 20%. And it’s all about survivorship bias: a country or a region does well and it will become a bigger part of the opportunity set. There are now three big countries in the benchmark: China, Taiwan and South Korea.
Q Is that because of what’s happened with all the semiconductor stocks this year?
Indeed. This year, and the last 24 months in general.
Q One of the big questions for investors is whether you bet on Asian AI or US AI; is having emerging market exposure a way to hedge yourself?
I think it’s much more than a hedge. If you look at the Magnificent Seven, the big US tech companies, they’ve been underperforming the US indices for the past six to nine months because the market is cautious on all the capex spend they’re doing on AI, and the market is asking: where’s my return? But if you look at emerging market tech businesses, the outperformance has been stark against the emerging market benchmark but even against the Magnificent Seven. Because those businesses earn the revenue that the Magnificent Seven spend as capex, and the market says: I’ll invest in a company that owns revenue upfront; why would I buy the one that’s spending the capex with no return hurdle?
It’s much more than a hedge; it’s a purer investment opportunity. We think that there are two phases of AI we’ve seen so far: the first phase was the introduction of AI. And in that phase, anything that touched AI went up. I think the second phase is the one we are in now, where the market distinguishes between AI losers and winners. And it doesn’t like the Magnificent Seven that are spending on AI; it likes the companies we call the Secret Seven, that are earning from AI. Phase three, which we’re probably approaching, is a phase where the market asks a different question: which are the companies that have successfully adopted AI to actually influence their bottom line?’
I think the real kicker is outside tech, where capital intensive businesses are going to be very powerful.
Developed markets for the last 20 years have done one thing: push capital intensity towards emerging markets, so developed markets became very capital light and emerging markets have become very capital heavy. If you think about phase three, if I’m a US software company now, I’m very capital light and I’m operating in an environment where a large language model can disrupt my ability to write code. I’m in trouble, right?
But if I’m a car manufacturer in Korea, people still need to go from A to B. So what am I going to do with AI? I’m going to fill my factory with robots. If you go to Xiaomi’s factory in China, the first thing you notice when you walk through the door is that it’s dark in there because robots don’t need light to work, so you save money just on electricity. If you think about the disproportionate value accretion that will accrue to capital-heavy businesses in emerging markets in the adoption phase, that is the wild card that is not being discussed, analysed and certainly not priced.
Q When you say it’s not being priced, are you saying that the Secret Seven are undervalued?
I think this is much more than the Secret Seven; they’re technology businesses and they’re trading at a cheaper multiple to the Magnificent Seven as a cohort. But they have better balance sheets, they’re all net cash whereas the Magnificent Seven are raising debt. And they’re growing faster than the Magnificent Seven with better-quality balance sheets, faster earnings growth and cheaper valuations. I think the real kicker is outside tech, where capital intensive businesses are going to be very powerful.
Q Is there not some sort of negative cycle here where if your factories are now staffed by robots, you don’t have humans who are earning, so who is going to buy your products?
True, and this was discussed in a paper this year by a research house called Citrini that described a very dystopian world, where all these AI savings mean there are fewer people in the workforce, which means lower consumption and weaker economies and so forth. The analogy we have is the industrial revolution and, for example, the introduction of cars that paved the way to get rid of horse-drawn carriages. The world adjusts. I can’t wrap the present and put a bow on it and tell you exactly where people will go and what they’ll do. But I think we’re all quite enterprising and we’ll find a level.
Q What other industries and companies do you favour in emerging markets?
We don’t think about the world necessarily through countries and sectors; we think about the world through stocks. Our largest position is actually not in Korea, not in Taiwan, not in technology, and not in AI. It’s in Chinese health care, in a company called Wuxi AppTec — a pharmaceutical business that’s a contract research development management organisation which is essentially a turnkey solution for big pharma.
The business has three divisions: a biology division, a testing division and a chemistry division. Within the biology division, the business will develop the active ingredients for a drug and then it will test that active ingredient for potential side-effects. And then it will move to the chemistry division, where it will test whether it’s curing the disease it was intended to cure in the first place. What’s powerful about that business is it’s uncorrelated to a very crowded trade that is technology and AI, and it’s a hugely strategic asset in the multipolar world we live in now where you have two superpowers butting heads.
This is a Chinese business that is heavily used by US pharma. And if you think about where the US may consider its next flashpoint, will it necessarily start here? Because if you start pummelling this business, ultimately what you’re doing is opening yourself up for US drug prices to go up, because this is the business that provides this sort of service at the most competitive price.
Q There was an argument last year that with the dollar weakening, emerging markets were a no-brainer buy. Is that still the case?
If we look at the last 20 calendar years of emerging markets, and you line up all the various asset classes from top to bottom and best to worst, emerging market equity as an asset class has either been the very best or the very worst, 75% of the time. It is inherently cyclical because the strength of institutions in emerging markets is inherently weaker than in developed markets. That means there’s a time to be invested in emerging markets, and then there’s a time to be on the sidelines. Historically, the framework for when you want to be involved in emerging markets is very straightforward: you need a weaker dollar, you need a strong earnings inflection, and then you need cheap valuations. Because cheap valuations in the absence of the first two things, the dollar and earnings, mean you’re just in a value trap.
Arguably, we’re in a once-in-a-20-year moment where these three things have come together at the same time.
Republished with permission from Financial Mail.
