Opinion: A Real Scarcity Trade is Underneath this EM Bounce

The emerging-markets rally isn't just about cycling into cheap valuations. Structural shortages in labor and commodities could turn the developing world into the next long-duration growth story.

Emerging market stocks have posted their strongest run in over a decade. The iShares MSCI Emerging Markets ETF is up 28.7% this year after nine straight months of gains. Goldman Sachs expects the rally to continue through 2025, driven by falling inflation, a weaker dollar, and improving earnings growth that should accelerate to 17% this year.

But there's a different story lurking beneath what looks like another cyclical rotation into cheap valuations. As artificial intelligence automates away high-paying knowledge work in developed countries, global scarcity could be shifting back to things that can't be digitized—physical commodities, manufacturing capacity, and young workers. The assets that emerging economies control in abundance.

The evidence is scattered but worth watching. Gold has surged to record highs as developing-country central banks stockpile physical assets. South Africa's JSE All Share Index has outperformed the S&P 500 this year, powered by mining companies that suddenly find themselves more indispensable. Meanwhile, software stocks that once commanded premium valuations are facing downgrades as rating agencies warn that AI could commoditize their core products.

This goes beyond commodity prices. For decades, developed markets commanded a premium because they specialized in high-margin, knowledge-intensive industries. The assumption was that emerging markets would forever play catch-up, providing cheap labor and raw materials while the real value creation happened in New York and Silicon Valley.

AI might be scrambling that equation faster than most expected. When algorithms can write code, analyze legal documents, and even compose music (badly, but still), the premium attached to cognitive work starts to look less permanent. McKinsey estimates that generative AI could automate up to 30% of hours worked in the US economy by 2030, with the heaviest impact on six-figure knowledge workers—the jobs that justified developed market valuations.

Meanwhile, emerging economies are sitting on resources that become more valuable by the day. Indonesia controls 23% of global nickel production, essential for EV batteries. The Democratic Republic of Congo produces 70% of the world's cobalt. Chile dominates lithium mining. These aren't assets that can be replicated in a data center, no matter how clever the code.

The demographic math is brutal for the developed world. Japan's working-age population is shrinking by 1% annually. Germany faces a labor shortage of 7 million workers by 2035. South Korea's fertility rate has fallen to 0.78, the lowest in the world. Meanwhile, countries like India, Nigeria, and Bangladesh are adding millions of young workers each year—people who can't be replaced by ChatGPT, at least not yet.

Smart money is already repositioning, though not always loudly. Sovereign wealth funds from the Middle East are pouring billions into African infrastructure. Chinese manufacturers are relocating to Vietnam and Mexico for access to younger workforces. Even BMW announced plans to build EV batteries in Morocco rather than expand in Europe. Morocco. Not Munich.

The policy response is accelerating the shift in ways policymakers didn't anticipate. The US Inflation Reduction Act and Europe's Green Deal are industrial policies designed to reshore critical supply chains. But here's the catch: the raw materials for this green transition are concentrated in emerging markets. The more the West tries to reduce dependence on China, the more it finds itself dependent on countries it once dismissed as peripheral.

Capital flows are starting to reflect this potential reallocation. Foreign direct investment into emerging markets reached $916 billion in 2023, the highest since 2016. Private equity firms are raising record funds for Southeast Asia and Latin America. Even retail investors are taking notice, with EM ETFs seeing their largest inflows in five years.

The risks remain real in currency volatility, political instability, weak institutions. And markets have a way of humbling grand theories about structural shifts. But if the developed world built its dominance on scarcity (skills, technology, capital) then the democratization of knowledge work and the aging of rich-country populations could be shifting that scarcity elsewhere.

What started as a routine EM bounce might be the opening act of something bigger. In a world where algorithms can think but can't mine copper, the countries that control real resources and young workers could be entering their moment. Whether they can capitalize on it is another question entirely.