Artificial intelligence has become one of the defining investment themes of the global equity market, but gaining exposure to that theme is more complicated than simply buying a broad technology or emerging-market fund. The composition of an index can determine which countries, companies and industries an investor actually owns, and that can leave significant parts of the AI ecosystem outside the portfolio.
One portfolio manager has argued that China represents an important missing component for investors seeking broader AI exposure. His argument is not that every investor should own Chinese equities, but that conventional emerging-market products may provide less direct exposure to China’s AI companies than their country weight might suggest.
The issue highlights a broader problem in thematic investing: geographic diversification and technological diversification are not necessarily the same thing.
Broad Funds Can Miss Concentrated Technology Exposure
Emerging-market funds often spread capital across several major economies, including South Korea, Taiwan, China, India and other markets. But those allocations are not necessarily proportional to each country’s importance in the global AI ecosystem.
The portfolio manager’s argument is that South Korea and Taiwan together account for almost half of the iShares MSCI Emerging Markets ETF, while the China-focused ETF does not itself provide a concentrated AI portfolio. This means an investor buying a broad emerging-market product may receive substantial semiconductor exposure through Korea and Taiwan while receiving relatively little exposure to Chinese AI companies.
That distinction is important because AI is not a single industry. The theme includes semiconductor manufacturing, cloud computing, internet platforms, software, industrial automation, power infrastructure and data centres.
A fund can therefore appear geographically diversified while remaining concentrated in only a few parts of the AI supply chain. Conversely, a China-focused portfolio may provide access to businesses that do not appear prominently in broader global technology funds.
China’s AI Exposure Extends Beyond Major Internet Firms
The investment argument for China is also broader than simply owning a few large technology companies. China’s domestic technology ecosystem includes internet platforms, semiconductor businesses, industrial technology and infrastructure companies that can participate in the AI economy in different ways.
The Matthews China Fund, managed by Andrew Mattock, illustrates this type of portfolio construction. Its June sector allocation showed 23.9% in information technology compared with 13.7% for its benchmark, alongside a substantial industrial allocation.
That structure reflects an important characteristic of AI investment. The financial benefits of AI do not necessarily accrue only to companies developing large language models or consumer-facing applications. Companies providing hardware, infrastructure, industrial systems and supporting services can also participate in the expansion.
China’s scale gives this ecosystem another dimension. A large domestic market allows technology companies to develop products for local consumers and businesses while industrial capacity can support the deployment of AI across manufacturing and infrastructure.
However, scale should not be confused with guaranteed investment returns. A large technology ecosystem can still produce uneven corporate performance.
The China Argument Comes With Significant Risks
China’s potential role in AI portfolios exists alongside substantial risks. Investors face regulatory uncertainty, geopolitical tensions, currency movements and differences in corporate governance. The domestic economy also remains uneven, with property-sector weakness and consumer-confidence concerns affecting parts of the broader market.
Those factors make China different from simply adding another technology allocation. An investor gaining Chinese AI exposure is simultaneously taking country-specific risks.
The performance of China-focused investment products also demonstrates why exposure and returns should not be treated as the same thing. The Matthews China Fund’s official data show that it is structured around long-term capital appreciation and invests at least 80% of assets in Chinese companies, while its technology allocation differs materially from its benchmark.
That structure can provide more targeted exposure to Chinese technology, but it also increases dependence on developments inside one market. The potential benefit of greater thematic exposure therefore comes with greater concentration.
This is the central trade-off behind the debate. A broad emerging-market fund may reduce country-specific risk but fail to capture a particular segment of China’s technology sector. A more targeted China strategy may increase access to that segment while increasing exposure to China’s regulatory, political, economic and market risks.
AI Investing Is Becoming a Portfolio-Construction Question
The broader lesson is that investors increasingly need to look through fund labels and examine what they actually own. “Emerging markets”, “technology” and “AI” are not interchangeable categories. Two funds with apparently similar geographic descriptions can have very different exposure to the companies that benefit from artificial intelligence.
The same principle applies globally. A portfolio containing US technology companies, Korean semiconductor manufacturers and Taiwanese chip producers may already have substantial AI exposure even without explicitly targeting the theme. Adding another technology-heavy fund may increase concentration rather than diversification.
China therefore enters the AI investment debate partly because of what broad indices exclude or underweight. The question is not simply whether China will benefit from artificial intelligence, but whether a particular portfolio already captures that exposure and, if not, whether the additional country-specific risks are consistent with the investor’s objectives.
The case for examining China as part of the AI landscape is consequently a question of portfolio construction rather than a simple prediction about market performance. The country’s technology industry represents a meaningful part of the global AI ecosystem, but accessing it requires investors to weigh thematic exposure against the risks created by concentration and the distinctive characteristics of the Chinese market.
(Adapted from BNPParibas-am.com)
