Emerging market stocks set for record high on tech optimism

EMERGING market (EM) stocks were on track to hit a record, buoyed by persistent gains in Asian technology shares that have fuelled risk appetite across the developing world.

The MSCI Emerging Markets Index rose as much as 1.5 per cent on Monday (Jan 5), poised to surpass a peak notched five years ago. Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung Electronics were among the top contributors to the gauge’s rally, each up more than 6 per cent.

The advance reflects strong investor demand for assets linked to artificial intelligence (AI), which remain a focal point in global equities. Benchmarks in South Korea and Taiwan, as well as a regional Asia-Pacific gauge, were also headed for fresh highs.

EM assets are starting the year off strong, and analysts expect the momentum could carry on. The developing nations’ stocks surged more than 30 per cent last year, their biggest annual advance since 2017. It was also the first year in eight they beat US peers, fuelling optimism that a multiyear cycle of investment inflows is underway.

Asia’s contribution to the EM rally has been particularly notable given its role as a key supplier of critical components for the AI supply chain. Yet, those gains have come with caveats. As markets heat up, shares of some of the biggest AI and tech firms have wobbled on valuation concerns, raising fears the sector’s surge may be entering a more volatile phase.

“Near-term, emerging markets can stay supported, but it’s likely a selective, bumpier grind rather than a straight-line rally,” said Charu Chanana, chief investment strategist at Saxo Markets. “The upside is that Asia tech and AI supply-chain momentum can keep pulling the index higher, especially if global risk appetite stays firm.”

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EM bonds and currencies traded mostly lower across Asia on Monday, though a key gauge of local currency bonds is up nearly 1 per cent over the past month. The index returned 9.3 per cent last year, the best annual performance since 2019, compared with a 6.3 per cent gain in an index of developed market peers. EM currencies also posted their strongest year since 2017.

Traders are now seeking for new catalysts to drive the next leg of the climb, with upcoming US economic data and key earnings to provide clues into the health of markets.

Concerns over the outlook of the US Federal Reserve’s planned rate cuts, renewed geopolitical tensions following the US raid that captured Venezuela’s leader Nicolas Maduro, and various upcoming elections across Latin America are keeping some investors cautious.