Speaker
Ian Smith
Appearances over time
1 episodes
Episodes
1
Podcasts
Quotes & moments
Technology now represents over 40% of the MSCI Emerging Markets index, making AI capex the dominant driver of EM performance.
Since the eve of the Middle East war, the EM index has performed approximately in line with the S&P 500 at about 11%, while outperforming the MSCI World index.
The 'fundamental stability' factor — a proxy for quality — has performed worse year-to-date in 2025 than at any point in MSCI EM history.
In 2025, there was a 20 percentage point relative performance gap between the MSCI EM Quality and Growth sub-indices.
The big 3 hyperscalers plus Meta, Oracle, and CoreWeave are expected to spend roughly $750 billion on AI capex in 2026, growing 80% year-over-year.
If current AI capex growth rates were sustained linearly to 2030 for just 6 companies, the cumulative spend would reach $8 trillion — which Ian Smith says is clearly unsustainable.
India's equity market has underperformed the broader EM index by almost 90% since approximately September 2024, largely reflecting prior overvaluation and EM's strong AI-driven rally.
William Blair uses a 10% dollarized internal rate of return as their minimum investment hurdle when evaluating EM stocks.
Emerging market equities were broadly in the doldrums from 2010 until very recently, representing over 15 years of underperformance relative to US stocks.
Between 2020 and 2025, the MSCI EM Quality and Growth sub-indices diverged in performance direction in 4 out of 5 years, versus only 1 out of 8 years from 2013 to 2020.
Despite recent outperformance, EM valuations relative to MSCI World remain about as cheap as they have been historically.
William Blair's quality-growth EM process starts with an opportunity set of approximately 250 higher-quality businesses globally.
The MSCI Emerging Markets index has existed since 1987, providing nearly four decades of performance data covering two full outperformance and two underperformance cycles.
Emerging markets span vastly different income levels, growth drivers, and political risks. Korea and Taiwan are high-income AI supply chain plays; India is a domestic demand story; LATAM sits in between. Lumping them together misses the opportunity.
EM offers two distinct opportunity sets: world-leading companies embedded in structural trends like the AI supply chain, defense, and power equipment; and domestic demand plays in underpenetrated markets riding S-shaped consumption curves.
Within EM, Korea and Taiwan dominate the AI capex supply chain — foundries, memory, power equipment, and niche semiconductor components. China follows. Other markets offer only idiosyncratic pockets of exposure.
For most of 2013–2020, quality and growth moved together in EM. Since 2020, cyclical and physical-world companies have dominated while quality stocks lag. In 2025 the gap reached 20 percentage points — the widest ever.
Every EM outperformance and underperformance cycle since 1987 has coincided with a weak or strong dollar. A benign dollar allows EM policymakers to ease monetary and fiscal policy, boosting domestic growth — the most powerful driver of EM returns.
Six major tech companies will spend around $750 billion on AI capex this year, growing 80% year-over-year. Extrapolate that to 2030 and you get $8 trillion from just those companies. That can't happen — capex will fade, and investors need to be positioned for when it does.
Investors are confusing the flow of new equipment orders with the growing stock of equipment already installed. For long-duration power infrastructure lasting 20–40 years, when the buildout ends, demand for new equipment can collapse to near zero even while the installed base keeps growing.
India has everything for long-term growth: young population, low income per capita, low credit penetration, pro-business government. But it's a net energy importer with no AI supply chain exposure — making it the anti-AI trade and punishing it with nearly 90% underperformance vs. EM since September 2024.
China's culture of 'involution' — hyper-competitive markets with abundant trapped capital and government-backed rivals — crushes domestic returns. But the same environment produces companies so battle-hardened they can compete and win anywhere in the world.
William Blair seeks companies that are quality leaders, have improving trajectories (rising ROIC, expanding TAMs, strengthening moats), and are underappreciated relative to their outlook. Quality is not the return driver — trajectory and underappreciation are. Quality is the insurance.
William Blair has dramatically escalated AI adoption over the last 6–9 months, using it to accelerate information gathering, supplement financial model building, and turn analysts into coding experts. But the firm is now moving from experimentation to optimized, guardrailed token usage.
EM's 12-month trailing performance dispersion is at its highest since the GFC — exceeding even COVID levels. That extreme dispersion is exactly the environment where active managers with the right analytical edge can generate alpha.
Across every great investor Ian Smith has studied, one principle recurs: find good companies and buy them at good prices. In a world of relentless news flow and volatility, the hardest — and most valuable — thing is simply not to forget that.
Quality investors' biggest trap is extrapolating historical financial strength into the future without testing whether the underlying qualitative attributes — management, moats, customer proposition — remain intact. AI will likely accelerate how many quality companies tip into decline.
Analysis
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- Business 75%
- Technology 25%
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