AI chip stocks now dominate emerging market indexes, alarming fund managers

Emerging market indexes, long valued for their diversification benefits, are increasingly dominated by a handful of AI-linked semiconductor stocks, raising concerns among fund managers that concentration risk now eclipses the traditional macro dangers of investing in the developing world.

A Narrow Set of Stocks Driving Returns

The top three stocks in the Morningstar Emerging Markets Target Market Exposure Index — Taiwan Semiconductor Manufacturing ↗ 0.36%, Samsung Electronics, and SK Hynix ↘ 0.79% — now make up 26.7% of the benchmark, according to Morningstar. Over the past year, these three companies have been responsible for roughly 57% of the index's 30.3% return. A similar pattern holds across other benchmarks: State Street Global Advisors noted in July that Korea and Taiwan together accounted for more than 90% of MSCI Emerging Markets Index returns over the prior 12 months, with TSMC, Samsung, and SK Hynix alone driving over 60% of performance.global.morningstar+1

Taiwan now holds a roughly 27% weight in the MSCI Emerging Markets Index after a 60% rally this year, while the MSCI Korea index has risen 87%, according to analysis by Laurium Capital. The Tech Hardware and Semiconductor sector, which represented about 15% of the index two decades ago, now accounts for just under 40%.dailymaverick

Historical Parallels Raise Red Flags

The current concentration exceeds previous episodes that ended in sharp selloffs. Research from Neuberger Berman found that the top 10 stocks in the MSCI Emerging Markets Index now hold a 39% weighting, compared with 28% during the China tech boom of 2020-21. Prior episodes of concentration — the 2010-11 commodity supercycle, the 2014-15 China cycle — were followed by declines of up to 35%.global.morningstar

"Being part of the crowd may offer temporary comfort," wrote Neuberger Berman emerging markets portfolio managers Vera German and Juan Torres. "But history's lesson is not simply that extreme concentration ends, it is that it can end sharply".global.morningstar

Managers Seek Alternatives

Some managers are already repositioning. "It's time to dampen concentration risk," said Mark Headley, executive chairman of Matthews Asia, pointing to opportunities in Chinese financials, ASEAN, and India. Callan's Paul Choi described the situation as "a double layer of concentration," noting investors seeking broad developing-world exposure are instead getting "a very large allocation to Taiwan, China, South Korea, and India, with a huge semiconductor engine inside it".callan+1

Despite the risks, 70% of active emerging markets funds have beaten their passive peers, partly because managers have leaned into AI momentum while earnings growth remained intact. The question now is whether that momentum can persist — or whether, as RQI Investors' David Walsh warned, investors are mistaking cyclical semiconductor profits for durable value.global.morningstar+1