▲ BlackRock
BlackRock, the world's largest asset manager, has reinstated its investment rating on emerging market stocks to "overweight" just three months after lowering it in June due to concerns over artificial intelligence (AI) concentration and leverage risks in countries like South Korea.
The de-leveraging, or reduction of borrowing, in the South Korean stock market during July and August was explicitly cited as a core rationale.
Wei Li, global chief investment strategist at the BlackRock Investment Institute (BII), and other strategists stated in a weekly report released on the 14th local time that access to scarce resources required for the AI boom and robust corporate earnings will drive excess returns in emerging market stocks.
In particular, they noted that South Korea and Taiwan occupy core positions in the semiconductor and memory supply chains, while Latin American markets provide exposure to raw materials and infrastructure necessary for building AI infrastructure.
On June 30, BlackRock had downgraded emerging market stocks from "overweight" to "neutral," pointing out that AI-related concentration and leverage, particularly in the South Korean stock market, had deteriorated the risk-adjusted return profile.
The latest report stated, "Since then, the South Korean stock market actually experienced losses, and the de-leveraging during the summer months has alleviated those leverage concerns."
In fact, domestic credit-based margin balances peaked at 38.6 trillion won on June 24 before experiencing sharp de-leveraging, dropping by 15.4% in about a month in the wake of successive circuit breakers and forced liquidations.
BlackRock also announced in the report that the adjustments are not limited to emerging market stocks, as it downgraded short-term European government bonds to "neutral" and upgraded emerging market local currency-denominated bonds to "overweight."
The strategists noted that whether this stance will be maintained depends on whether faster earnings growth and cheaper valuations can offset risks stemming from rising borrowing costs, high oil prices, and geopolitical tensions.
According to the report, earnings for the MSCI Emerging Markets Index are projected to grow by 34.2% over the next 12 months, whereas the MSCI USA Index is expected to see growth of only 20.3%.
Emerging market stocks trade at a forward 12-month price-to-earnings (P/E) ratio of about 10 times, representing a discount of roughly 50% compared to U.S. stocks at 19.9 times, the strategists added.
"As interest rates are reset to higher levels, the hurdle for taking risks is rising, making earnings sustainability even more important," the strategists said. "Emerging market stocks now offer another venue where earnings can clear that higher hurdle."
(Photo: Getty Images)
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