BlackRock Inc. has reinstated its overweight rating on emerging market equities, betting that scarce resources essential to the artificial intelligence boom and robust profit growth will drive outperformance. South Korea and Taiwan serve as the "core" of the semiconductor and memory chip supply chain, while Latin American markets offer the commodities and infrastructure needed for AI buildout, strategists at the firm's research unit wrote in a note. The company expects rising investment in the technology to enhance the value of these constrained resources and underpin corporate earnings.

Back in June, BlackRock had downgraded emerging market stocks from "overweight" to "neutral," cautioning that AI concentration and leverage, particularly in South Korea, had undermined the risk-reward profile of the asset class. The firm now says that deleveraging following July's sharp selloff in South Korean equities has helped support its decision to move back to an "overweight" stance.

The key question now is whether faster earnings growth and more attractive valuations can offset the risks posed by higher borrowing costs, elevated oil prices, and geopolitical tensions. BlackRock also sees a softer U.S. dollar and improved capital flows as supportive for emerging markets, as investors reassess the landscape after recent market turbulence.

"Even if the AI-driven investment boom consumes capital, power, and other scarce resources, it can still support economic growth and profits," the strategists added. "These data points further bolster the case for returning to emerging market equities." The note further stated: "With interest rates running higher, the bar for taking on risk is elevated, making earnings sustainability more critical. Emerging market equities now present another avenue for corporate profits to clear that higher hurdle."