The case for playing the AI trade in emerging markets
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Wall Street insists AI is not a bubble. But with some clients not convinced, HSBC is steering them toward emerging markets for cheaper, diversified AI exposure.
Why it matters: With high valuations making stocks expensive in the U.S., there may be better deals abroad, the bank says.
What they're saying: "If you are a bit worried about this AI trade, actually, EM (emerging markets) can give you that AI exposure" with "probably not as much downside risks as you have if everything goes belly up on the AI space," HSBC global equity strategist Alastair Pinder tells Axios.
- Emerging markets have become increasingly linked to the AI trade, with around 45% of emerging market stocks having some exposure to the AI theme, which is about equal to U.S. exposure.
- The basket of emerging markets AI stocks screened by HSBC trades at 18 times forward earnings. The S&P 500 trades at 25 times forward earnings.
Between the lines: HSBC is not bearish on the U.S. or artificial intelligence. The bank is just more bullish everywhere else.
- That view is a continuation of the ex-U.S. trade that dominated this year, with the global MSCI ex-U.S. index up 27% year to date, compared to the S&P 500, which is up 16% in the same period.
- Even with those gains, international stocks are still "under allocated" and comparatively cheap, according to Pinder.
Reality check: But valuations alone aren't enough to create conviction in investments, Pinder says. "You don't want to be like, 'Oh, the U.S. is bad to invest in, Europe is cheap.' That's not a good reason."
- His view is that Europe is undergoing a valuation rerating as global stimulus coupled with a weaker dollar could spur upside.
- His call is not just that international stocks are cheap, it's that he sees several catalysts driving them higher.
The bottom line: Fed easing, falling dilution, a weaker dollar and renewed foreign inflows could all reinforce continued upside internationally.
- But the broad message from Wall Street: Don't give up your AI allocation while hunting for protection abroad, just in case your bubble nightmare fails to materialize.
