Firm cut outlook in June over AI concentration, margin financing risks
July–August deleveraging seen easing leverage concerns
EM earnings forecast to grow 34% — far outpacing US at 20%
Korea, Taiwan semiconductor supply chains highlighted; P/E at half US level
BlackRock, the world's largest asset manager, has upgraded its investment view on emerging market equities — including South Korean shares — to overweight, reversing a downgrade it made just three months ago. The firm cut its outlook in June, warning of excessive concentration in AI-related stocks on the Korean market and dangerously elevated leverage. It now says a wave of deleveraging that swept through the domestic market over the summer has largely cleared those risks.
The BlackRock Investment Institute said Monday that Wei Li, the firm's global chief investment strategist, and colleagues raised their view on emerging market stocks from neutral to overweight in their weekly report.
BlackRock said access to scarce resources needed to expand AI investment, combined with solid corporate earnings, would support outperformance in emerging market equities. It particularly highlighted Korea and Taiwan as sitting at the "core" of the semiconductor and memory chip supply chain. Latin America, it added, stands to benefit from demand for raw materials and infrastructure investment tied to AI data center and power grid construction.
The shift in Korea's market was cited as a key factor in the decision. On June 30, BlackRock downgraded emerging market equities from overweight to neutral, saying concentration in AI-related names and rising leverage on the Korean market were worsening the risk-reward outlook.
Since then, however, the Korean market has corrected and a large-scale summer deleveraging has changed the picture, BlackRock said. "Korean equities did subsequently suffer losses, and summer deleveraging has eased leverage concerns," the report stated.
Domestic margin financing balances peaked at 38.6 trillion won ($28.7 billion) on June 24, then fell 15.4 percent in roughly a month as the market plunged, triggering successive circuit breakers and forced selling.
Faster earnings growth and relatively lower valuations among emerging market companies were also cited as factors boosting investment appeal.
BlackRock projects that earnings for companies in the MSCI Emerging Markets Index will grow 34.2 percent over the next 12 months, well above the 20.3 percent growth forecast for the MSCI USA Index.
The valuation gap is even wider. Emerging market stocks trade at a forward price-to-earnings ratio of roughly 10 times — about 50 percent below the 19.9 times multiple for US equities. Emerging markets are priced at half the valuation of the US even though they are expected to deliver faster earnings growth.
BlackRock also upgraded its view on emerging market local-currency bonds to overweight, while cutting short-term European government bonds to neutral.
Risks remain, however. High oil prices, geopolitical tensions and elevated borrowing costs are still variables, and BlackRock said the extent to which faster emerging market earnings growth and lower valuations can offset those risks will determine its investment stance going forward.
"As interest rates reset higher, the bar for taking risk is rising, making earnings sustainability more important," BlackRock strategists said. "Emerging market equities now offer another destination that can clear this higher earnings hurdle."
sjy@heraldcorp.com
