Strategic Reallocation in the AI Era: Diversifying Portfolios Through Undervalued Regions and Sectors

The artificial intelligence (AI) revolution is reshaping global investment landscapes, creating both opportunities and risks for portfolios. As private investment in AI surged to $252.3 billion in 2024, with generative AI accounting for 20% of this total, the focus has shifted from direct AI development to indirect beneficiaries-particularly in undervalued regions and sectors poised to capitalize on the broader economic ripple effects of AI growth according to the 2025 AI Index Report. This reallocation strategy demands a nuanced understanding of where AI-driven demand is spilling over into infrastructure, energy, and policy-led markets.

The Rise of Undervalued Regions

India has emerged as a critical player in the AI ecosystem, leveraging its strengths in software and services. High end-user adoption of AI tools has attracted investments from global tech giants like Microsoft and Google, positioning India as a future hub for AI infrastructure. Despite challenges such as energy constraints and underinvestment in AI expertise, India's structural advantages-including a large pool of engineers and government-backed digital initiatives- suggest long-term potential.

China, meanwhile, is navigating a dual challenge: geopolitical tensions and a push for self-sufficiency. The country's AI sector has rebounded with the rise of cost-effective models like DeepSeek, supported by robust government funding for infrastructure and energy solutions. Chinese tech firms, including JD.com and NetEase, now hold substantial cash reserves (up to 77% of market value in some cases), enabling aggressive expansion into AI-driven ventures. However, U.S. export restrictions and global adoption hurdles remain significant headwinds.

Taiwan's dominance in semiconductor manufacturing has made it a linchpin of the AI supply chain. The IT sector in Taiwan saw a near 130% growth in the two-year period ending September 2025, driven by demand for advanced chips. The Taiwanese government's $500 billion economic initiative over 15 years aims to transition the country from a manufacturing base to an AI superpower, further solidifying its strategic role.

Valuation Metrics and Strategic Entry Points

Emerging markets, including India, China, and Taiwan, trade at a 32% discount to developed markets based on next-12-month price-to-earnings (P/E) ratios, reflecting undervaluation despite strong earnings growth. The MSCI Emerging Markets Index is projected to deliver its strongest annual return since 2017, fueled by a weaker U.S. dollar and a global rotation into non-U.S. equities. For instance, South Korea's SK Hynix and Taiwan's TSMC are direct beneficiaries of AI data center spending, with their high-bandwidth memory (HBM) chips becoming essential for AI servers according to market analysis.

In the U.S., smaller-cap companies and banks are gaining traction as monetary easing and deregulation create a more favorable environment for indirect AI beneficiaries according to investment insights. This trend underscores the importance of diversifying across geographies and sectors to capture AI-driven growth without overexposure to high-valuation tech giants.

Strategic Reallocation: Navigating Geopolitical and Structural Shifts

The U.S. is increasingly adopting a coercive form of managed trade, linking private AI investment to national security and industrial policy. This approach, while centralizing AI infrastructure within the U.S., also creates opportunities for emerging markets to fill gaps in the global supply chain. For example, China's focus on self-sufficiency in semiconductors and AI models is reshaping its technological landscape, with Huawei and Xiaomi leading in domestic innovation.

Investors should prioritize regions where AI adoption is catalyzing structural changes. Multimodal AI, which integrates text, audio, and video inputs, is reducing barriers to adoption and enabling customized solutions in sectors like healthcare and education according to market analysis. This shift favors countries with strong software ecosystems, such as India, and those with advanced manufacturing, like Taiwan.

Risks and Constraints

Despite the optimism, challenges persist. Geopolitical tensions, particularly U.S.-China trade dynamics, could disrupt supply chains and limit the global reach of Chinese AI models. Additionally, physical constraints-such as energy shortages in India and construction bottlenecks in emerging markets- may delay large-scale AI infrastructure projects. Regulatory shifts, including stricter data governance in the EU and U.S., also pose risks to cross-border AI collaboration.

Conclusion

The AI-driven investment era demands a strategic reallocation toward undervalued regions and sectors that benefit indirectly from the technology's proliferation. India's software ecosystem, China's policy-led innovation, and Taiwan's semiconductor dominance offer compelling opportunities for diversification. By balancing exposure to these markets with a focus on valuation metrics and geopolitical resilience, investors can position portfolios to thrive in an AI-augmented world.