T. Rowe Price: EM concentration and correlation risks are underappreciated

T. Rowe Price: EM concentration and correlation risks are underappreciated Multi asset investors may be taking on more tech exposure than they realise in their emerging market equity allocations. Multi asset investors may be taking on more tech exposure than they realise in their emerging market equity allocations. The outperformance of technology stocks in emerging markets (EM) may be proving problematic for multi-asset investors looking to diversify their sources of alpha in portfolios. This is according to Thomas Poullaouec (main picture), portfolio manager and head of global investment solutions, international at T. Rowe Price. “For cross-asset investors, EM allocations may be taking on more technology and growth exposure than many realize, bringing underappreciated concentration and correlation risks,” he said in a recent note. The blistering rally in technology and semiconductor stocks in major EM markets like Taiwan and South Korea has meaningfully changed the market’s sector composition. The MSCI Emerging Markets Index has seen its technology sector exposure rise from 24% at the end of 2024 to roughly 42% today. Additionally, Taiwanese and South Korean equities now account for more than 50% of the entire index, versus less than 30% at the end of 2024. Performance of Emerging Market equities over 2 years Over the past two years, emerging market equities are up 72% versus 41% from developed market equities as measured by the MSCI World Index. EM equities’ factor exposures have also shifted dramatically, with the index having a much larger weighting to momentum relative to developed market equities compared to two years ago. But although the concentration risks and correlation risks have risen, it has also improved EM equities’ exposure to structural earnings growth, according to Poullaouec, which supports his overweight view on the asset class. “Investors may still view EM as a play on regional economic growth, commodities, Chinese consumer demand, and global trade, but the asset class is increasingly tied to AI infrastructure, semiconductors and digital platforms,” he said. “This does not mean EM has become less cyclical; rather, the source of cyclicality has shifted. EM may now be more exposed to semiconductor cycles, hyperscaler capex, AI sentiment, and broader investor appetite for growth stocks.” For equities more broadly, T. Rowe Price has raised its overall overweight on the back of increased capital spending on AI, energy security and defence. The firm favours US and emerging markets but is underweight Europe due to the region’s higher sensitivity to energy costs. The firm also increased its underweight to fixed income and maintained a short duration profile, reducing exposure to high yield bonds due to inflationary pressures that could trigger credit spread widening. Multi asset investors may be taking on more tech exposure than they realise in their emerging market equity allocations. Roughly 50% of respondents in Schroder’s Global Investor Insight survey said they were concerned about a downturn or recession.