Emerging markets: enough is not enough

Emerging Markets: From "Tactical Allocation" to "Core Holding"

The article opens by noting that many investors still use an outdated "map" to navigate emerging markets, leading to severe under-allocation. The author draws an analogy to the ancient Indian port of Muziris, which declined due to shifting river channels—the geography changed, but investors' routes did not. The author states: "Many investors still navigate emerging markets using an outdated map." The core argument is that investors tracking the MSCI Global Index hold nearly as much combined weight in Nvidia, Apple, and Microsoft as they do in the entire emerging market asset class. This imbalance is increasingly at odds with the evolution of the emerging market asset class, which now features resilient economies, deep domestic capital markets, and companies indispensable to global growth.

Two Key Misconceptions: Homogeneous Fragility and Dollar/Commodity Cycle Dependence

The article argues that investors' prevailing perceptions of emerging markets are rooted in the past, leading to two critical errors.

The first misconception: viewing emerging markets as a homogeneous group of fragile economies. The author points out that two-thirds of the MSCI Emerging Markets Index is composed of China, Taiwan, and South Korea—economies with sound fiscal positions, investment-grade ratings, and deep industrial and technological expertise. Many emerging market countries now outperform their developed market peers on metrics such as fiscal deficits and debt-to-GDP ratios.

The second misconception: treating emerging market returns as merely a leveraged bet on the dollar and commodity cycles. The author argues that while the U.S. remains important, trade, capital, and corporate earnings are no longer tied to a single external cycle. China is now the primary trading partner for many countries, intra-emerging economy trade is expanding, and domestic demand is growing. Reliance on foreign capital has declined as domestic savings pools, pension systems, and local capital markets have matured. Returns are increasingly shaped by a broader set of drivers, such as semiconductor leadership in Asia, digital finance in Latin America, and infrastructure, power, and logistics investments across the developing world.

From Macro Trades to Global Champions: Selectivity Matters More Than Passive Allocation

The article emphasizes that emerging markets now boast listed companies with global competitive advantages and financial resilience, yet investors still primarily view them through the lens of their country of listing. The author states: "These are companies with world-leading products and technologies at the heart of global supply chains. Yet investors often analyse them like local emerging market businesses, primarily through the risks associated with their country of listing."

Taking China as an example, the author argues that "Made in China" has evolved from a label of low-cost manufacturing to a badge of technological capability, industrial leadership, and national ambition. China's strategy in AI is particularly noteworthy—while the West focuses on building the most powerful frontier models, China emphasizes widespread deployment in factories, services, and infrastructure, aligning with its strengths in scale, rapid product development, and hardware-software integration. China's renewable energy capacity, clean technology supply chains, and cheaper AI models could lower deployment costs, which is crucial for AI adoption across the entire emerging market landscape.

The article concludes that there is a vast gap between winners and losers, and passive exposure could concentrate a portfolio in the wrong sectors or companies. The takeaway is that the changing opportunity set strengthens the case for selectivity, not complacency.

Investment Implications

• Reassess Allocation Weights: The author implies that current portfolio weights for emerging markets (relative to their share of global GDP, corporate quality, and growth potential) may be too low. Investors should shift from asking "why hold?" to "how much to allocate?"
• Active Stock Picking Over Passive Indexing: Indices fail to capture the structural divergence within emerging markets. Actively identifying global champions (such as TSMC, Samsung, and other implied but unnamed names) is more important than simply tracking an index.
• Beware of Institutional Bias: As a long-term emerging market bull fund, Baillie Gifford's narrative naturally carries a motive to persuade investors to increase allocations. Readers should note the selectively presented optimistic evidence (e.g., fiscal resilience, AI deployment advantages) and independently assess risks that are not fully explored, such as geopolitical tensions and currency volatility.

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Emerging Market Risks Require Stock-Picking Discipline, Not Avoidance

The author argues that emerging market risks are real but not uniformly distributed; the key lies in selective investment rather than blanket avoidance. The report points out that emerging markets trade at a discount to developed markets due to factors including "unstable macro conditions, weak currencies, policy intervention, bad governance and turbulent politics." Some of this discount may be justified, but it could also reflect an outdated risk premium—the market now includes high-quality companies strategically important to global supply chains.

Specific risks include:

• Macro and currency risks: Inflation shocks, current account pressures, and sudden policy changes can overwhelm otherwise strong companies, while local currency depreciation can wipe out overseas investors' local returns.
• Regulatory and governance risks: Companies may face domestic state intervention, cross-border restrictions, rising disclosure requirements, and weak auditing standards. Minority shareholders cannot always assume fair treatment, and the range of outcomes is broader than in developed markets. However, many emerging market companies meet high global standards, and governance improvements themselves can be a source of returns.
• Geopolitical risks: Supply chain frictions, tariffs, regulatory changes, exchange rate volatility, and market access restrictions directly impact corporate performance. These risks must be incorporated into analysis, but political events themselves are difficult to predict, and false precision is unhelpful.

The author concludes: "None of this argues for avoiding emerging markets. It argues for selectivity and discipline." These risks should shape how investors seek growth, not deter them from seeking it.

Emerging Market Allocation Should Be a Strategic Core, Not a Benchmark-Driven Afterthought

The author believes that the weight of emerging markets in portfolios is far below their economic importance, and investors should treat them as a strategic allocation. As of the end of June 2026, emerging markets accounted for approximately 12.2% of the MSCI ACWI Index, while many active global equity funds allocate even less. In contrast, emerging markets contribute about 60% of global GDP, 86% of the world's population, and are expected to generate two-thirds of global growth in the coming years.

The author emphasizes that this is not an argument for allocating portfolios by GDP or population weight—economic growth does not automatically translate into listed company profits, and corporate growth does not always benefit minority shareholders. Market accessibility, governance, capital allocation, dilution, and valuation must all be considered. However, the gap is large enough to challenge entrenched assumptions: emerging markets' share of global economic activity, population growth, manufacturing capacity, and innovation far exceeds their weight in many portfolios.

The author proposes that full allocation must pass three tests:

1. Large enough to influence portfolio outcomes;

2. Selective enough to avoid the weakest parts of the asset class;

3. Patient enough to capture the compounding effect of exceptional companies.

Investment Implications

Author perspective bias note: Baillie Gifford is an active emerging market investor, and its argument naturally serves the position of "increasing allocation to emerging markets." Readers should note that the judgment that "the discount may reflect an outdated risk premium" is essentially a defense of the firm's own strategy by its holders. While the risk section candidly lists macro, governance, and geopolitical challenges, it ultimately concludes that "these should be addressed through stock-picking discipline," without discussing scenarios where systemic risks (e.g., global capital flight) could render such discipline ineffective.

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Position Moves

Ticker	Direction	Author's One-Sentence View	Key Data
NVIDIA	Hold & Observe	Mentioned as a benchmark for comparison, implying its overweight distorts investors' perception of emerging markets	Investors' combined holdings in NVIDIA, Apple, and Microsoft are nearly equal to their total holdings in the entire emerging market
Apple	Hold & Observe	Same as above, cited as an example of developed market concentration	Same as above
Microsoft	Hold & Observe	Same as above, cited as an example of developed market concentration	Same as above
TSMC	Not explicitly stated	Implied as a representative global champion, a target that active stock picking should capture	Taiwan is one of the top three constituents in the MSCI Emerging Markets Index
Samsung	Not explicitly stated	Same as above, implied as a representative global champion	South Korea is one of the top three constituents in the MSCI Emerging Markets Index