High-quality stocks had a very poor first quarter in Emerging Markets (EMs), primarily due to Information Technology (IT) stocks, which also tend to trade at higher valuations. Stocks in the top third of quality underperformed the lowest third by close to 15%, the kind of sharp sell-off last seen four years ago when companies were still coming out of the depths of the COVID-19 pandemic.
Within the IT sector, semiconductor and other hardware stocks linked to the AI value chain sold off sharply after Chinese AI-startup DeepSeek released a large language model that rivaled the leading models at a fraction of the training cost, raising concerns that AI-related capex spending may drop.
Additionally, shares of IT-services companies were also weak. Most reported fourth-quarter earnings in line with expectations but provided disappointing guidance for 2025, quashing hopes of an acceleration in demand this year. Of course, additional trade-related uncertainty has skyrocketed since the end of the first quarter as global markets convulsed sharply in the wake of Trump’s tariffs in early April (with North America being a large market for many EM-based IT companies).
Still, despite the short-term uncertainty, the advancement of new technologies has increased the long-term opportunities for high-quality and fast-growing EM IT companies. ∎