BlackRock's investment research arm has upgraded emerging market equities back to an overweight recommendation, driven by a confluence of AI-related resource scarcity, robust earnings growth potential, and notably cheaper valuations relative to developed markets.

Strategists led by Wei Li stated in a Monday report that while the AI investment boom will inevitably consume substantial capital, electricity, and other scarce resources, such spending is still poised to underpin broader economic growth and corporate profitability. The team noted that emerging market equities now present a fresh avenue where earnings can surpass increasingly high expectations set elsewhere.

Consensus forecasts cited by the strategists indicate that earnings per share for the MSCI Emerging Markets Index are expected to surge by over 34% in the next twelve months. This compares favorably to a projected 20% EPS increase for the MSCI USA Index, highlighting a significant divergence in growth trajectories. Furthermore, the analysis points out that emerging market stocks are currently trading at a substantial 50% discount to their US counterparts, making the valuation case compelling.

Additional tailwinds supporting the bullish stance on emerging markets include a depreciating US dollar, which tends to benefit risk assets and these economies, alongside an anticipated increase in capital inflows into the region.

Delving into regional specifics, the strategists highlighted the critical roles of South Korea and Taiwan, which sit at the core of the semiconductor, memory chip, and hardware supply chain that is essential to the AI buildout. Meanwhile, countries like Brazil in Latin America are positioned to supply the raw materials and physical infrastructure necessary for AI-related construction projects.

This upgrade reverses a previous decision made in June, when the firm had downgraded emerging market equities from overweight to neutral. That earlier move was attributed to concerns over concentration risk within the AI sector and rising leverage issues, particularly prevalent in the South Korean market. In Monday's report, the strategists acknowledged that South Korean stocks subsequently experienced a selloff, and the summer period brought significant deleveraging that has alleviated those earlier leverage worries. These developments have bolstered their confidence in reinstating the overweight rating.

Despite the shift on emerging markets, BlackRock maintains its overweight positions on US equities and the broader AI trade. The firm has also adjusted its stance on short-term European government bonds, lowering them to a neutral rating.