Markets face a 'tug of war' between AI fundamentals and leverage: Allspring

• Emerging markets (excluding memory chipmakers) have shown resilience due to strong economic fundamentals and high real interest rates, making some attractive carry trades.
• Rising U.S. bond yields and potential U.S. market wobbles pose a risk to EM, with historical patterns suggesting difficulty for EM to sustain gains during major U.S. risk-off moves.
• Concerns are growing over significant leverage and off-balance sheet obligations among Asian tech companies and U.S. hyperscalers, which could amplify downside risks if interest rates continue to rise.

The discussion highlights a 'tug of war' in emerging markets (EM) between strong economic fundamentals and the risks posed by rising U.S. bond yields and high leverage, particularly in Asian tech and U.S. hyperscalers. While some EM countries have shown resilience, a significant U.S. market downturn could challenge their sustainability, especially given concerns about AI investment and associated debt.