(Aug 21): The tech rally in emerging-market stocks is spreading across new companies as investors rotate beyond chipmaking heavyweights into smaller names poised to power data centres. 

King Slide Works Co, Henan Shijia Photons Technology Co and EverProX Technologies Co are among the top performers in MSCI’s Emerging Markets Index this month, notching gains of up to 90%. Together, they are helping rekindle enthusiasm in Asia’s artificial intelligence (AI) narrative, which wobbled in June and July after a year-long US$17 trillion (RM68.77 trillion) bull run. 

For many investors, it’s the next stage of the AI rally. Chipmakers such as Samsung Electronics Co, SK Hynix and Taiwan Semiconductor Manufacturing Co benefited from the initial phase of the buildout. Now the focus is shifting to so-called picks-and-shovels firms that supply server components, cooling equipment and high-speed optical connections. 

“AI is a full-stack capital cycle and that thesis is being validated layer by layer,” said Jitania Kandhari, who helps manage US$2 trillion at Morgan Stanley Investment Management in New York.

US hyperscalers have collectively committed almost US$2.4 trillion in AI infrastructure spending, and providers of items like cooling systems and power distribution units are well positioned to grab a slice of that, according to Kandhari. 

They are “sitting on order books that give them multi-year revenue visibility”, she said. “The market is pricing that visibility.”

The infrastructure firms are also eyeing opportunities from the AI boom in China as it develops its buildout aimed at laying the foundations for long-term growth.

The investment case for AI infrastructure stocks rests on the same dynamic that drove memory-chip makers’ gains in the past year — shortages of the equipment and components needed to run AI systems, coupled with a limited pool of companies able to produce them. 

“We see signs of broader leadership within the AI supply chain after a highly concentrated performance,” said Nenad Dinic, a Zurich-based equity strategist at Bank Julius Baer. He expects emerging market performance in the second half of the year to be more evenly distributed across the AI supply chain.

Even as investors broaden the set of AI companies they chase, they’re all still largely located in China, Taiwan and South Korea. That means emerging-market equity investing is likely to remain a lopsided affair. 

Asia accounts for 82% of MSCI’s emerging equity index by weight, leaving a mere 18% to eastern Europe, Middle East, Africa and Latin America. The rise of new AI infrastructure firms is likely to reinforce the dominance of these three countries, as well as the technology sector’s weight in benchmarks. 

That is posing more concentration risks. With so many big companies tied to AI, any macro shocks or a reduction in hyperscaler capex would likely spark an across-the-board sell-off. 

“We would not describe second-tier AI companies as a hedge against weakness in the AI leaders,” Dinic said. “They ultimately depend on the same underlying AI capex and infrastructure cycle.” 

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