While the artificial intelligence (AI) boom has largely been framed through the lens of US mega-cap technology companies, new Morningstar research suggests the greatest economic and market leverage may instead lie within emerging markets – which the firm says sit at the core of the global AI value chain.
According to Morningstar’s report: Time to rebalance East? The Structural Case for Emerging Market Equities, emerging-market stocks have produced a notable performance over the 12 months through to the end of May 2026.
“The AI narrative has been dominated by US mega-cap software platforms such as Microsoft, Alphabet, Amazon.com, and Meta Platforms. Specialist managers argue this misses where the real bottlenecks – and the real pricing power – sit,” the report said.
“A cluster of semiconductor and technology companies across Taiwan, China, and South Korea has become indispensable to the AI buildout, supplying leading-edge logic chips (TSMC, Samsung), high-bandwidth memory (SK Hynix, Samsung), advanced packaging (ASE, TSMC), and data center power systems (Delta, Foxconn).”
Morningstar’s analysis points to positive earnings-per-share revisions of between +20 per cent and +80 per cent across Taiwan and South Korea as some of the strongest indicators that earnings growth is expanding beyond US mega-cap companies. Several investment managers specifically identified these two markets as preferred overweights.
“For investors, the logic is pointed: Gaining AI exposure through developed-market software stocks at historically stretched valuations is not the only route. Emerging market leadership in hardware may be the more durable entry into the same theme.”
The MSCI Emerging Markets Index gained 38 per cent – significantly outperforming the S&P 500’s 16 per cent and the MSCI World Index’s 14 per cent – prompting a key question: was the previous year simply a temporary surge, or the beginning of a longer-term shift?
Morningstar’s director Eva Cook said market sentiment increasingly indicates that the investment case is not based solely on recent momentum, but on a structural change in the forces that allowed developed markets to lead for more than a decade.
“The case for emerging-market equities rests on four reinforcing pillars: a turning dollar cycle, a recovering earnings trajectory, historically wide valuation discounts versus the US, and structural leadership in the AI hardware economy,” Cook said.
“The tariff shock of 2025 tested the thesis and ultimately reinforced it – accelerating supply chain diversification into emerging markets and contributing to the very dollar weakness that now supports the asset class. That represents a fundamentally different backdrop from the one that suppressed emerging market returns for much of the past decade.”
Within the wider emerging-market universe, two markets remain central to the equity debate – though for very different reasons.
China, representing roughly 30 per cent of the MSCI Emerging Markets Index, remains an unavoidable market exposure, according to Morningstar.
The report said the country’s recent story has been ‘bruising’, shaped by a prolonged property downturn, weak consumer confidence, and ongoing geopolitical tensions.
However, Morningstar noted that the structural outlook is changing. Since the collapse in the property sector, China has shifted its economic focus towards domestic consumption, services, and innovation in areas including electric vehicles and artificial intelligence.
“Those who spend time there describe a pace of industrial development – in EVs, robotics, and power Infrastructure – that has no equivalent elsewhere,” the report stated.
“Vehicle models taking five-plus years to develop in the West are turned around in eight months in China, and the same accelerated logic is spreading into AI hardware. China is adding electricity generation capacity at 6 times the US rate over the next five years, a structural power advantage as AI demand scales.”
Morningstar highlighted that investment potential and governance risks remain closely linked, with ongoing misalignment between controlling shareholders and minority investors. State involvement also means companies may become more exposed to risk as they expand.
Given this backdrop, the firm said investors need to focus on selectivity rather than broad market exposure.
The second market shaping the equity discussion is India.
“India, by contrast, is the conviction overweighting across almost every manager we spoke to despite high valuations,” the report said.
Morningstar said the combination of demographic strength, urbanisation, rising household wealth, and favourable policy settings is occurring as a lengthy corporate deleveraging cycle comes to an end – historically one of the strongest foundations for sustained equity outperformance.
“India’s maturing and broadening listed universe – spanning financials, industrials, consumer staples, and technology – gives active managers the ability to express long-term views through stock selection rather than index-level bets,” the report said.
For investors seeking exposure to emerging markets, Cook said execution and portfolio construction remain essential.
“Active management often adds value given the inconsistent corporate disclosures, concentrated ownership structures, uneven minority shareholder protections, and high retail participation all create pricing anomalies that skilled active managers can exploit.”
“At the same time, maintaining sufficient breadth through diversified exposure helps capture the full opportunity set while reducing the risk that any single position or theme dominates portfolio outcomes.”