Emerging markets are the engine of today’s global economic landscape, with the International Monetary Fund (IMF) projecting that they will contribute about 80% of global gross domestic product (GDP) growth in 2025.
These aren’t new arguments, but when we look at the global economy’s main challenges, emerging markets offer answers. The energy transition requires key minerals, such as lithium, copper, nickel and platinum. Emerging markets are the largest, lowest-cost, most efficient, and highest-quality producers of these resources.
Semiconductors are the picks and shovels powering the era of artificial intelligence (AI); Asian foundries dominate 90% of the global revenue of manufacturing chips.
More than 80% of the world's new middle-class consumers are in emerging markets, where retail sales growth is twice as fast as in developed markets.
Emerging markets are not just engines for the world’s incremental growth, but also innovation hubs that provide critical inputs that the modern world needs. They are world-class in batteries, semiconductors, mining, fintech, gaming, e-commerce and social networks.
Emerging markets are rapidly adopting AI, 5G and fintech at scale, often bypassing legacy infrastructure. India now stands as the largest and most engaged mobile internet user market in the world, while China contributes more than half of the global AI research papers.
In a multipolar world, emerging markets are trading more with each other. As this trade increasingly happens in currencies other than the dollar, this will further liberate emerging markets from their dependence on US policy.
Under a new model of intra-emerging market trade, it’s far more likely that counterparties will denominate deals in renminbi, rupees or reals. Profits are also more likely to be recycled back into emerging markets themselves, creating positive feedback loops.
Despite being home to a disproportionate number of great growth companies, the emerging markets remain an under-owned asset class. Its weight in global indices is a mere 10% and global investors have been underweight EM in recent years.
We believe missing out on investment opportunities in great emerging market companies is one of the biggest risks for long-term investors. Baillie Gifford’s flagship Long Term Global Growth strategy, which invests in a small, concentrated portfolio of the world’s best growth companies, holds a third of its assets in emerging markets, which is 22% overweight the MSCI All Country World index.
It's worth noting that gaining emerging market exposure via investing in multinational companies is no longer as effective. Younger shoppers increasingly prefer local brands and the beneficiaries of the next cycle will far more likely be homegrown.
China’s innovation-led growth is gaining momentum. Post the ‘DeepSeek moment’, platform companies are rapidly adopting and scaling new technologies – the new ‘ABC’ of China: AI, Big Data and Cloud.
Manufacturers are also charting their own path at a remarkable speed and scale. In 2019, China was barely a blip in the global auto supplier map; today, it is the biggest by far.
However, Chinese companies also operate in the most competitive market in the world. BYD recently slashed prices by a third on most models and JD.com made an aggressive entry into the food delivery market to compete head-to-head with Meituan.
Only the most efficient and adaptable players will survive, but the reward for the winners will also be substantial in China’s continental-sized market.
In many emerging countries, people are more likely not to have a bank account than a smartphone. This has provided a unique opportunity for digital companies to develop innovative products that simultaneously serve the underserved and underbanked.
Indonesia has around 18,000 islands, so digital first is a must. SEA Ltd is the dominant force in the mobile economy there.
In Latin America, where a large portion of the population still does not have a bank account, digital banks like NuBank are becoming a key disruptor in the industry. NuBank is now the world’s largest digital bank outside China.
Or take Kazakhstan, which has produced a super app, ‘Kaspi,’ that empowers everyday life. Its digital payment platform processes 30% of the country’s GDP, showcasing innovation from a lesser-known market.
To identify companies with long-term winning potential, investors should have an appropriate investment horizon – in our view, five years or more.
Our analysis shows that in emerging markets, companies delivering the highest quintile of hard currency earnings growth over a five-year rolling period typically deliver the best share price returns.
A pragmatic approach to evolving growth drivers is also essential. This means focusing on companies that grow over longer periods than expected, at faster rates than expected, or surprise by growing when no growth is expected at all. We have found these are the most persistent sources of outperformance.
Last but not least is a focus on the company’s adaptability and resilience. Maintain a laser focus on companies’ durable competitive moat and be highly vigilant on buy and sell discipline.
Qian Zhang is an investment specialist at Baillie Gifford. The views expressed above should not be taken as investment advice.