Rethinking the Emerging Markets Exit: AI, Supply Chains, and the Case for Patience

From strategic supply chain realignment to national investments in AI and digital infrastructure, several emerging markets (EM) are laying the groundwork for building structural resilience. While not evenly distributed, these trends are already reshaping the long-term opportunity set in select economies.

This piece explores where long-term capital might find renewed value—not by ignoring near-term risks, but by reassessing them in light of recent and impending changes across the investment landscape.

The Long-Term Case for Emerging Markets

While volatility can temper allocation, emerging markets have remained a long-term opportunity set for investors seeking structural growth and diversification. Despite ongoing macro and political risks, youth populations, rising middle classes, and urbanization trends continue to support this momentum. And while short-term outflows may reflect legitimate concerns, they can also obscure inflection points. In 2022, FCLTGlobal emphasized the importance of patient capital in EMs.² That message still resonates—but in 2025, the drivers of long-term value may be shifting from reform to reinvention, with artificial intelligence (AI) emerging as one of the forces behind that shift.

A New Catalyst: Artificial Intelligence

Artificial intelligence is quietly gaining ground in select emerging markets, unlocking early signs of productivity growth. In India, initiatives like the AI for Agriculture Innovation (AI4AI) program are transforming farming by providing smallholder producers with AI-driven tools for better decision-making.³ The “Saagu Baagu” project in Telangana, for example, has improved yields and incomes for thousands of chili farmers by combining local agri-extension services with predictive data analytics. In Pakistan, the government is exploring ways to convert surplus energy capacity into data infrastructure to support AI computing.⁴ And in Brazil, the federal government has launched a national AI strategy for 2024–2028, aiming to accelerate adoption across industry, education, and the public sector.⁵ Across emerging markets, AI is beginning to show up not just as a consumer technology, but as a productivity tool with system-wide potential.

The idea that AI will only benefit advanced economies misses the bigger picture: EMs are actively embedding these technologies into their development strategies. These innovations are investable—not only because they are novel, but because they are aligned with national priorities and supported by rising digital infrastructure. For long-term investors, these early signals suggest that AI could become a meaningful—and underappreciated—driver of future value in emerging markets.

The Tariff Shock and Capital Flight

Recent U.S. tariff announcements and growing trade frictions have contributed to sharp outflows from emerging markets. In early 2025, Asian equity markets saw the largest capital flight in over 15 years, driven by investor fears of escalating trade barriers, slowing Chinese demand, and supply chain disruptions.⁶

Forecast revisions reflect mounting pressure:

The Asian Development Bank projects that growth in developing Asia will ease to 4.9% in 2025 and 4.7% in 2026, down from 5.0% in 2024.
The ADB warns that the full implementation of recent U.S. tariffs could further reduce growth by up to one percentage point by 2026.⁷
Meanwhile, the International Trade Centre warned that escalating trade tensions could shrink global trade by 3–7% and cut global GDP by 0.7%, with emerging economies bearing the brunt.⁸

Tariffs have also jolted markets by creating uncertainty around sector-specific exemptions. U.S. tech stocks rebounded after temporary relief on hardware tariffs, but EM tech firms and exporters remained exposed to demand volatility.⁹

In this context, capital flight is understandable for EMs more exposed to global supply chains. Still, others are benefiting from trade reconfiguration. For long-term investors, the question isn’t whether volatility exists, but whether current reactions reflect long-term fundamentals or short-term noise.

Where Select Emerging Markets Still Offer Long-Term Potential

While recent volatility has driven capital out of emerging markets, it’s also revealing divergence beneath the surface. For long-term investors, the opportunity may lie in identifying which EMs are positioned to benefit from structural shifts—not abandoning the asset class altogether.

Supply Chain Realignment:
Tariff pressures are prompting multinationals to diversify production beyond China. Countries like Vietnam, Mexico, and Indonesia are gaining momentum as manufacturing hubs, attracting foreign direct investment and infrastructure upgrades.¹⁰ ¹¹ ¹² These trends aren’t evenly distributed, but they represent a durable shift for some economies.
Domestic Market Growth:
Some EMs are actively strengthening internal demand through improved credit access, rising wages, and investment in local services.¹³ These dynamics make certain economies more resilient to external shocks and global trade volatility.
Technological Advancements:
Innovation is accelerating in select EMs where governments and private firms are investing in digital infrastructure, clean energy, and AI.¹⁴ These efforts are most promising where technological adoption aligns with national priorities and market readiness.
Valuation Opportunities:
Broad outflows have driven down prices across EM asset classes, but in many cases, the correction has outpaced fundamentals. Some equities and bonds now trade at steep discounts, creating selective entry points for long-term portfolios.¹⁵ The challenge—and the opportunity—is in distinguishing signals from distractions.

How Long-Term Investors Can Stay the Course

Rather than exit emerging markets wholesale, long-term investors can reassess how and where to maintain exposure. As macro headwinds continue, a selective, forward-looking approach can help distinguish resilience from risk:

Scenario planning: Use tools to model how EM regions may diverge under different tariff, commodity, and AI adoption scenarios. Stress-testing across macro and structural drivers can help uncover overlooked opportunities or hidden risks.
Portfolio segmentation: Tilt allocations toward countries with rising domestic demand, improving policy frameworks, or advancing digital infrastructure. Where dispersion grows, so does the case for country- and sector-level nuance.
Stewardship: Engage with companies to understand how they are navigating supply chain shifts, investing in productivity, or adapting to policy changes. Where direct engagement isn’t possible, incorporate innovation signals into due diligence.
Valuation Opportunities: Recent capital outflows have driven down EM asset prices across the board. But in some markets, the selloff has outpaced fundamentals, creating potential entry points for investors with a multi-year horizon and the discipline to separate signal from noise.

Conclusion

Capital flight often signals fear, but it can also precede reinvention. As AI, industrial shifts, and domestic strength begin to take hold, investors willing to distinguish among markets may find opportunities others overlook. Volatility is a reality, but so is the potential for structural transformation, especially through AI. For long-term investors, the question is no longer whether to invest in EMs—it’s where, why, and with what time horizon.

Reuters. “Trump’s Trade Policies Triggered Largest Asian Equity Outflows in at Least 15 Years in Q1.” Reuters, April 3, 2025. https://www.reuters.com/markets/trumps-trade-policies-triggered-largest-asian-equity-outflows-least-15-years-q1-2025-04-03/
FCLTGlobal. “Why Investors Need a Long-Term Approach to Emerging Markets.” April 14, 2022. https://www.fcltglobal.org/resource/why-investors-need-a-long-term-approach-to-emerging-markets/
World Economic Forum. “AI for Agriculture: How Indian Farmers Are Harvesting Innovation.” January 2024. https://www.weforum.org/stories/2024/01/ai-for-agriculture-in-india/
Yahoo Finance. “Pakistan Turns to Bitcoin Miners, AI Data Centers to Use Surplus Power.” April 2025. https://finance.yahoo.com/news/pakistan-turns-bitcoin-miners-ai-135739713.html
Institute for Technology and Society (ITS Rio). “Brazil’s Federal Government Launches the Brazilian Artificial Intelligence Plan (2024–2028).” February 23, 2024. https://ids.org.br/en/news-post/brazils-federal-government-launches-the-brazilian-artificial-intelligence-plan-2024-2028/
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Asian Development Bank. Asian Development Outlook: April 2025. April 2025. https://www.adb.org/publications/asian-development-outlook-april-2025
International Trade Centre. “Trade and Tariff Risks in a Fragmented Global Economy.” March 2025. https://intracen.org/news-and-events/news/trade-and-tariff-risks-in-a-fragmented-global-economy
Bloomberg. “Tech Stocks Rebound as U.S. Adjusts Tariff Schedule.” April 10, 2025. https://www.bloomberg.com/
Vietnam Briefing. “Industrial Zones in Vietnam: 2025–2030 Growth Outlook.” Vietnam Briefing, February 2025.

https://www.vietnam-briefing.com/news/vietnams-industrial-zones-2025-2030-growth-outlook.html/
Bloomberg. “Mexico’s Exports Hit Record in Sign Nearshoring Is Booming.” April 27, 2023. https://www.bloomberg.com/news/articles/2023-04-27/mexican-exports-jump-to-record-in-sign-nearshoring-is-booming
The Jakarta Post. “Batang Industropolis Now Officially an SEZ, More to Come, Govt Vows.” March 20, 2025. https://www.thejakartapost.com/business/2025/03/20/batang-industropolis-now-officially-an-sez-more-to-come-govt-vows.html
Reuters. “India File: Investors Look Homeward for Safe Harbours.” April 16, 2025. https://www.reuters.com/world/india/india-file-investors-look-homeward-safe-harbours-2025-04-16/
Global Energy Alliance for People and Planet. “The Intersection of Digital and Green Economies Takes Center Stage.” March 25, 2025. https://energyalliance.org/the-intersection-of-digital-and-green-economies-takes-center-stage/
IG Wealth Management. “2025 Market Outlook: Investors Poised for a Resilient Year.” January 2025. https://www.ig.ca/en/media-room/media-releases/ig-wealth-management-2025-market-outlook