This investment perspective uses the MSCI Emerging Markets Index as its reference benchmark.
Country classifications differ across benchmark families. MSCI continues to classify South Korea as an emerging market, while FTSE classifies it as a developed market.
This distinction is particularly relevant for investors using FTSE-based strategies, including widely used Vanguard index funds, where Korean exposure may reside within developed rather than emerging markets.
As a result, investors’ exposure and sensitivity to the Korea-related trends discussed in this paper may vary depending on the benchmarks used across their non-U.S. portfolios.
BY SARAH TODD
Principal/Associate Director Research
Emerging markets were the best-performing equity market over the past year, led by Taiwan and South Korea. As global investment in AI accelerated, both markets benefited from their significant technology exposure and critical roles in the AI buildout. Much of this performance has been driven by three companies at the center of the global AI supply chain: Taiwan Semiconductor (TSMC), Samsung Electronics, and SK Hynix.
Idiosyncratic regional and country-specific factors have always been inherent in the emerging markets asset class, reflecting the unique political and economic backdrop of each country. Today, however, a common global investment theme has become an increasingly important force driving benchmark returns. The MSCI Emerging Markets
Index is increasingly concentrated and technology-oriented, thus increasing its sensitivity to many of the same forces influencing global technology markets.
Recent market volatility serves as a reminder of this changing sensitivity. The risks themselves are not new, but their relevance to benchmark-level outcomes has increased as the underlying composition of the index has evolved.
In this investment perspective, we look beneath the surface of the MSCI Emerging Markets Index to examine how benchmark leadership has evolved, what is driving today’s concentration, and the risks associated with this changing exposure. Understanding what sits beneath the index — and what investors actually own — is increasingly important.
Periods of heightened concentration are not unprecedented within emerging markets. Following the commodity super-cycle of the 2000s, the resource-rich BRIC countries (Brazil, Russia, India, and China) accounted for nearly half of the MSCI Emerging Markets Index by May 2010. For much of the following decade, China dominated the emerging markets investment narrative. Rapid economic expansion, supported by the country’s transition from export-oriented industrialization toward greater domestic consumption, drove China’s benchmark weight to a peak of 42% in October 2020. Leading companies such as Alibaba and Tencent also became the index’s largest constituents during this period.
Today’s benchmark reflects a different story—and an even greater degree of concentration. The surge in global demand for AI infrastructure has shifted that leadership to Taiwan and South Korea, given their positioning as technology-oriented markets. Both countries combined have now surpassed China to become the benchmark’s largest country weights. Together, they now account for more than half of the MSCI Emerging Markets Index.
Sector composition has evolved alongside country leadership. Energy and materials represented a much larger share of the benchmark during the BRIC dominance, while consumer and technology exposure increased alongside China’s rise. More recently, the AI buildout has pushed information technology to its highest historical benchmark weight, accounting for just over 45%.
Concentration is most pronounced at the individual company level. TSMC, Samsung Electronics, and SK Hynix have become increasingly dominant benchmark constituents. At June 30, 2026, the three stocks together accounted for over 30% of the index.
How did we get here? The answer starts with technology.
Taiwan and South Korea have among the highest technology sector exposures in the emerging markets universe, with companies spanning semiconductor manufacturing, advanced memory, electronic components, and hardware.
As global demand for AI infrastructure accelerated, the composition of these markets positioned them to benefit disproportionately.
Taiwan’s leadership has been anchored by TSMC, which remains central to the global AI supply chain. Rising demand for semiconductors supporting AI applications and hyperscale infrastructure has continued to strengthen the company’s earnings outlook.
South Korea’s story reflects a combination of technology-related tailwinds and idiosyncratic, country-specific factors. Tightening high-bandwidth memory (HBM) supply, improving pricing power, and stronger earnings visibility have boosted Samsung Electronics and SK Hynix. Reports that customers are increasingly seeking long-term supply agreements have further strengthened earnings visibility and pricing power. Beyond technology, Korea has also benefited from corporate reform momentum and better-than-expected GDP growth, albeit this was primarily driven by memory exports.
Despite the magnitude of recent returns, valuations also remain relatively attractive, particularly compared with many of the U.S. technology companies benefiting from the same
AI investment cycle.
While benchmark returns have become increasingly concentrated in TSMC, Samsung Electronics, and SK Hynix, exposure to the AI theme extends much further than these names.
Emerging markets are home to many of the companies providing the “picks and shovels” behind the continued buildout of AI infrastructure. Beyond semiconductor manufacturing and memory, the asset class includes businesses involved in semiconductor design, AI servers, networking equipment, electrical infrastructure, power management, and other technologies supporting AI deployment. Emerging markets are also a significant source of copper, lithium, nickel, and rare earth elements required to build and power AI infrastructure development.
While this depth broadens participation in the AI theme, it also increases the index’s sensitivity to the global tech cycle.
Historically, correlations between emerging markets and U.S. equities have varied considerably, often rising during periods of broad global market stress. This was particularly evident around the Global Financial Crisis and COVID pandemic, when common global shocks became dominant drivers across equity markets.
More recently, however, correlations have reversed sharply outside a comparable period of synchronized global market stress. The one-year rolling correlation between the MSCI Emerging
Markets Index and the S&P 500 Index reached approximately 0.99 in March 2026, its highest level since the aftermath of the dot-com bubble in 2002. We acknowledge the one-year correlation is a short-term measure and therefore more sensitive to near-term market movements, but it provides a useful view of the recent change in the relationship between the two markets.
While it is too early to know whether the recent increase will persist, the trend merits monitoring as technology and AI-related demand become increasingly important common drivers across global equity markets.
The evolution of the index has implications beyond concentration alone. Greater exposure to technology and the global AI investment cycle has increased the benchmark’s sensitivity to risks that have long existed within the asset class. Some are specific to the industries driving recent returns, while others reflect the geopolitical and competitive dynamics surrounding the global technology supply chain.
Memory Cycle
Samsung Electronics and SK Hynix are among the world’s largest memory producers, and both have benefited from surging demand for high-bandwidth memory (HBM). Tight supply, stronger pricing, and longer-term customer contracts have improved earnings visibility and contributed to the view that AI demand could make the current memory cycle more durable than prior cycles. Yet memory has historically been a boom-and-bust industry. Samsung and SK Hynix are investing heavily to expand capacity, raising the risk that today’s shortages could eventually give way to excess supply if capacity growth outpaces demand.
AI Spending
The demand side of the equation is equally important. Much of today’s AI infrastructure investment is being driven by a relatively small number of U.S. hyperscalers, whose capital spending has increased sharply since the current AI boom began in 2023. Current plans suggest spending will remain elevated, but the sustainability of that investment will ultimately depend on returns. If AI-related spending fails to translate into revenue and profitability, greater scrutiny of capital expenditures could slow investment and ripple through the broader supply chain.
China Competition
China’s push toward greater technological independence could create additional competitive pressure for today’s regional leaders. The July 2026 IPO of ChangXin Memory Technologies (CXMT), now the world’s fourth-largest memory chip producer, highlights China’s progress in building domestic semiconductor capacity. While CXMT continues to lag established producers in advanced HBM, additional Chinese capacity could pressure memory pricing and market share over time. DeepSeek provides another notable example of China’s ability to challenge established technology leaders, demonstrating its ability to develop a competitive AI model at significantly lower cost.
Geopolitical Uncertainty
Taiwan is uniquely important to the global technology supply chain given its central role in advanced semiconductor manufacturing. China has made its goal of eventual unification with Taiwan clear. While direct military intervention remains an extreme scenario, heightened cross-strait tensions—or a potential conflict—could have significant implications for TSMC and disrupt semiconductor supply globally. TSMC’s growing importance within the MSCI Emerging Markets Index has increased the potential impact of this longstanding geopolitical risk on benchmark performance.
U.S.-China technology tensions add another layer of uncertainty. Restrictions on exports of advanced semiconductors and semiconductor-manufacturing equipment to China could affect companies throughout the regional technology supply chain, while additional restrictions or retaliatory measures could further disrupt trade and accelerate China’s efforts to develop domestic alternatives.
Retail Participation
Retail investors, known locally as “ants”, have become an increasingly influential force in South Korea’s equity market. Recent enthusiasm around Samsung Electronics and SK Hynix has coincided with growing use of leveraged single-stock ETFs, adding a more speculative element to the rally and potentially amplifying market moves in both directions. Following the sharp July sell-off, Korean regulators moved to limit access to these products in an effort to temper volatility. Still, elevated retail participation and leverage may continue to contribute to periods of heightened domestic market volatility.
Despite today’s benchmark concentration, the underlying emerging markets universe remains deep and diverse, with potential long-term growth drivers extending beyond the current market leaders. Even within AI, the opportunity set reaches well beyond the likes of TSMC, Samsung, and SK Hynix. As the AI buildout evolves, the next phase of investment may broaden across second- and third-order beneficiaries supporting AI infrastructure. Innovation may also create new disruptors and reshape existing leadership, as recent developments such as DeepSeek and CXMT in China illustrate.
Beyond technology, differentiated structural growth drivers remain across the emerging markets universe. Many themes have faced meaningful headwinds and struggled to keep pace with AI-driven market leadership in recent years. Longer-term trends tied to domestic growth, infrastructure investment, digitalization, financial inclusion, and industrial development continue to shape markets in the asset class. Recent performance has been uneven, but these structural trends remain part of the broader emerging markets growth story.
As emerging markets continue to evolve, understanding what sits beneath the index remains increasingly important. Today’s concentration has increased sensitivity to the technology cycle and several related risks, but it does not define the broader asset class. Periods of heightened benchmark concentration may also highlight the role of active management in portfolios, as active managers have flexibility to look beyond the largest constituents, access differentiated sources of potential growth, and pivot exposures as market conditions and leadership evolve.