AI’s second wind: where investor confidence is growing

AI has been arguably the largest factor shaping markets for the past few years now, and despite investor nerves around the price of some AI-focussed companies, markets are still charging ahead. But while the first few years of the AI theme left the US with the biggest benefits, the fastest growth is now happening in emerging markets ex-China.

In the first five months of 2026, emerging markets ex-China have increased by 37.2%, according to the Morningstar EM ex China index. This is leagues ahead of the competition, with the United States at 10.5% and the UK at 6.2%. On a five-year timeframe, emerging markets ex-China is up 95.4%, while the US is up 95.1% and the UK sits at 68.8%. Emerging markets can be intimidating to some investors and may not fit with the needs of those who don’t want to expose themselves to higher risk markets.

But for investors who chose to dive in this year, they would be benefitting from the biggest gains so far this year. In AJ Bell’s Adventurous fund, over 5% of the 11.3% gain this year has been thanks to emerging markets ex-China, while it accounts for 15% of the portfolio. The portfolio’s main exposures to the AI theme come from a combination of the holdings in the US and in emerging markets ex-China. While we hold slightly less in the US compared to our peers, we hold more in emerging markets ex-China, where valuations have been lower. Together, the regions account for 45% of the Adventurous Fund.

The two biggest countries in emerging markets ex China are Taiwan and South Korea, who have been in the right industry at the right time. Home to some of the largest chip makers, including companies TSMC and SK Hynix (who at the end of May joined the ‘trillion dollar club’), the region is being powered forward by the AI theme. While other regions have AI plays, what has worked in emerging markets ex China’s favour is that these companies are essential to the supply chain to construct AI.

Success for companies in the AI pipeline is nothing new or necessarily surprising. But what’s more remarkable is how these companies have outpaced other stocks that have been the face of AI for years. AI golden child Nvidia's share price has grown 16% to TSMC’s 49% this year.

The manufacturer boom

While Nvidia designs chips, it outsources the actual mass production to companies like TSMC. These producers are the companies having a real moment. And the growth isn’t solely in emerging markets excluding China, although it is the most prevalent.

In the S&P 500, there are some standout performers from companies that sat outside the top ten at the start of the year, notably Intel up 181%, and Micron up 226%. Each of these companies are manufacturers of essentials for AI. Intel creates CPUs, while Micron focus on memory and data storage. Just a few years ago, Micron and Intel started to appear in value indices because their share prices had been so low as other technology shares skyrocketed.

So, part of these returns may be because they had lots of room to grow. But the performance of these ‘picks and shovels’ AI names seem to be a second wave of investor enthusiasm for the theme.

What may be more puzzling to investors is why the other major technology names haven’t seen the same magnificent gains they did a few years ago. Some AI software providers are still growing, but there's more fragmentation.

There are a few complications in this part of the market, which is making it more difficult for investors to choose winners. Many companies that produce AI software, like Microsoft, also produce other technology. Some analysts are concerned that different areas of the company could end up in competition with each other, so even as, say, Microsoft CoPilot grows, other areas shrink. Other tech companies that have taken big bets on AI, such as Meta, are struggling to live up to their promises. Some investors are concerned that the large capital expenditures that have gone towards AI creation may not pan out in the long term.

What analysts have more faith in is pure AI plays, but many of the major players here are yet to hit the mainstream market. OpenAI, owner of ChatGPT, confidentially filed for IPO in June. Anthropic, the owner of Claude, has arguable produced some of the largest AI advances in the past year. But they also remain private for the moment, although they also filed IPO paperwork. Investors who aren’t able to access private plays may be more comfortable sticking with the public companies they feel are long-term winners, which seems more established on the hardware side than the software side.

It’s worth noting that just because these companies are not yet public, doesn’t mean investors can’t gain some access by other means. Investment trusts can put their money into private companies. Baillie Gifford US Growth and Scottish Mortgage Investment Trust both invest in Anthropic, at 7.5% and 2.6%, respectively.

But among those wanting to invest broadly in AI exposure, emerging markets continue to lead the pack and offer something different to the US market.