Emerging markets are an AI play at a huge discount, says HSBC's Alastair Pinder

Well, now US markets hitting a record highs this year, but it's still underperforming the emerging market index by a lot. According to Oppenheimer, around the world we've got the largest percentage of stock indices at all-time highs in 26 years. Some of those indices are the NIK, Korea's Cosby, the stock 600, Germany DAX, Brazil's Bvespa, and Egypt's EGX30. So should you diversify outside the US going into the new year, or is it too late? Let's bring in Alistair Pinder, HSBC head of emerging markets and global equity strategist. Alistair, it was a long period of not much going on for international markets investors. All about like domestic, domestic, domestic. We have people saying that, but if you were in some of these indices already, you're having a great year not sweating the volatility so much. But are these things now moving in lockstep with the US? I'm looking at Korea. You have SKH Highix, Samsung sort of getting into this AI stuff. Can you use that to diversify your portfolio or is this sort of a global enthusiasm?

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Alistair Pinder

Well, I think you touched really the key issue on the head here which is at least for emerging markets. I would say the big thesis to go into this area is that it essentially is an AI play but at a huge discount and doesn’t have the same kind of ownership and the crowding like you see in some of these AI stocks in the US. So this is particularly Asia. You can think about China, Korea, Taiwan. Essentially, to me, this is AI stocks at a cheap discount and guess what? They haven’t done all of this capex like the Mag 7. So we’re not even that worried about the return on investment when it comes to the AI story. And the other big thing that's been really supportive this year for international equity markets is the dollar. The dollar has been strengthening a little bit, but I think fundamentally the dollar is still going to weaken going into next year. And that to me again supports the case for emerging market equities and even going into areas like Europe as well.

At CNBC the on air folks can’t invest in individual stocks, so I tend to look through a lot of mutual funds and indices to see what’s really in these things? And a lot of them are utilities, banks, not necessarily stuff that would benefit hugely from AI. Where should investors particularly look when thinking about that AI theme that you’re talking about?

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Alistair Pinder

If you take EM, here’s a great stat: new economy sectors such as tech, semis, EVs used to be 15% of the EM index, now nearly 40%. What you’ve seen in EM Asia particularly fits that theme. Europe’s Germany stands out as the clear winner of some international rotation due to heavy infrastructure spending going into next year. Flows out of Germany have come out, valuations have derated a bit, but there’s lots of growth upside for Germany next year. Also, some of the best performing markets this year have seen stimulus—monetary or fiscal—like Mexico cutting rates today. EM Asia, EMEA, and LATAM including Mexico and Brazil have elevated interest rates and bond yields, with room to cut and that should support valuations. That drives a valuation rerating more than earnings growth, and that should be a key story going into next year.

Are trade policies and tariffs factoring into some of these global market moves or are these bull markets taking root despite that?

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Alistair Pinder

Weirdly, tariffs have been a good thing for international markets because stimulus from China and Germany is to offset tariffs. Tariff uncertainty is starting to come down. Many of the prior concerns about tariffs impacting exports may have been overstated. Also, new trade deals, e.g. Trump’s Asia tour and a possible USMCA deal next year, are positive catalysts for international markets.

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