For decades, emerging markets have largely been viewed through a macro lens: a bet on a weaker U.S. dollar, rising commodity prices and stronger global growth. Ben Buckler, Investment Specialist at Baillie Gifford, argues that this mindset is increasingly outdated. Instead, he sees emerging markets becoming less of a cyclical “beta” play on the global economy and more of a source of structural, company-specific growth. For a traditional 60/40 portfolio, where equity exposure is increasingly concentrated in developed markets, emerging-market equities could offer not only additional growth potential but exposure to a different set of structural growth drivers and sources of return.
“If we look at the trends reshaping the world, whether AI, electrification, changing supply chains or the emergence of a multipolar world, they are shifting the geoeconomic center of gravity,” says Buckler. “All of these trends are shifting where growth and innovation are coming from, increasingly towards emerging markets.” This shift, he argues, has important implications for how institutional investors should approach the asset class. Rather than starting with country or benchmark weights, investors should focus on identifying companies whose competitive advantages are positioned to benefit from these structural changes.
“If we look at the trends reshaping the world, whether AI, electrification, changing supply chains or the emergence of a multipolar world, they are shifting the geoeconomic center of gravity.”
Ben Buckler, Investment Specialist at Baillie Gifford.
In the context of a traditional portfolio’s 60 percent equity exposure, which is heavily weighted toward developed markets, Buckler points to missed growth opportunities in areas such as semiconductors, batteries, digital finance and consumer champions. “If you take all of the companies in the MSCI ACWI that are forecast to grow their revenues 20 percent a year for the next three years, then over 70 percent of them come from emerging markets,” he says, noting that emerging markets account for only around 12 percent of the MSCI ACWI.
Economic Weight Is Not the Investment Case
Emerging markets now account for a growing share of both global GDP and the world’s population, while faster economic growth, rising incomes and expanding middle classes are creating a broader and deeper pool of companies and investment opportunities. But for Buckler, the case is not simply that emerging markets represent a larger part of the world and therefore deserve a larger allocation. Their growing economic weight is changing the nature of the opportunity itself.
“I’m not in the camp that simply says emerging markets represent a big part of the world, so you need to put more money there,” he says, pointing to countries such as Turkey and Argentina, where economies have grown while stock markets have gone backwards in hard-currency terms. Economic growth, in other words, does not automatically translate into attractive equity returns.
“…emerging markets are not only generating the demand; they are also developing the capabilities and solutions needed to overcome the constraints.”
Ben Buckler, Investment Specialist at Baillie Gifford.
The opportunity, in Buckler’s view, lies in the fact that emerging markets are increasingly both creating demand and developing the capabilities to meet it. As he puts it, these are areas “where emerging markets are not only generating the demand; they are also developing the capabilities and solutions needed to overcome the constraints.” This dynamic fits naturally with Baillie Gifford’s bottom-up approach, which focuses on identifying companies capable of benefiting from structural growth rather than positioning portfolios around broad macroeconomic trends.
Bottom-Up Investing, With Country Context
“Fundamentally, we are bottom-up driven, trying to identify companies with the growth profiles that 32 years of evidence have shown us can deliver outsized returns,” explains Buckler. “That’s Baillie Gifford’s philosophy.” However, he is quick to emphasize that a purely bottom-up approach is not sufficient in emerging markets. “Country analysis remains essential for us; inflation, currency pressure, regulation and political intervention all matter. All of those things can overwhelm a very strong company at times,” he argues. “But when building a portfolio, the country provides the context for the investment decision; it doesn’t necessarily provide the investment thesis itself.”
“When building a portfolio, the country provides the context for the investment decision; it doesn’t necessarily provide the investment thesis itself.”
Ben Buckler, Investment Specialist at Baillie Gifford.
The end goal for Buckler and the Baillie Gifford team is therefore to identify the strongest companies while overlaying an assessment of the broader forces that could support or constrain them, including governance, stakeholder considerations, regulation and geopolitics. The need for such selectivity is reinforced by what Buckler describes as the increasingly heterogeneous nature of emerging markets.
Consider semiconductor manufacturers in Taiwan, digital banks such as Nu Holdings in Brazil and industrial automation companies such as Midea in China. All may sit under the same emerging-markets label, but their economics are fundamentally different. “Their customers, competitive advantages and underlying growth drivers are all fundamentally different,” argues Buckler.
China: Too Important to Ignore
That distinction becomes particularly important when considering China. While some investors have adopted separate approaches to China, Baillie Gifford does not fundamentally treat the country differently from other markets. “We are focused on finding companies that can deliver earnings growth, while taking into account the risks and constraints,” says Buckler. “In that context, we find China quite exciting. From a bottom-up perspective, China is clearly delivering some of the best companies in the world, globally relevant.”
“We are focused on finding companies that can deliver earnings growth, while taking into account the risks and constraints. In that context, we find China quite exciting.”
Ben Buckler, Investment Specialist at Baillie Gifford.
Excluding China, he argues, would mean giving up a substantial part of the emerging-markets opportunity set, including exposure to some exceptional world-leading companies. But the opportunity comes with a distinct set of risks. “We’ve got to recognize that China carries distinctive regulatory, governance and geopolitical risks,” he acknowledges. “However excited we may be about individual companies, our positioning has to reflect those broader macroeconomic, geopolitical and regulatory risks.”
The scale of the opportunity reinforces the need for selectivity. China faces significant state influence, which can create risks where government priorities are not aligned with shareholders. “That point of selectivity is really quite important, both to maximize the opportunity set, but also to minimize the risks that come from broader and thematic factors,” says Buckler.
The Rise of Domestic Emerging-Market Champions
More broadly, the emerging-markets opportunity stretches across vastly different countries, continents, religions, cultures and stages of economic development. Yet beneath that diversity, a common set of forces is reshaping consumer demand: rising incomes, expanding middle classes and growing populations. Together, these trends are creating increasingly attractive markets for financial services, healthcare, mobility, travel and discretionary goods.
“To some extent, 20 years ago, that would have been exciting if you were Porsche, Volkswagen, Coca-Cola or Louis Vuitton,” says Buckler. Today, however, he sees a different opportunity emerging: the rise of domestic companies that understand and serve their own consumers. “It could be Nu Holdings or Natura in Brazil, BYD or Luckin Coffee in China,” he says.
“Emerging-market companies are increasingly delivering solutions designed specifically for emerging-market consumers. That ecosystem is becoming far more important in emerging markets today.”
Ben Buckler, Investment Specialist at Baillie Gifford.
The shift matters because many emerging-market companies are no longer simply beneficiaries of global brands or suppliers to developed-market businesses. Increasingly, they are building their own brands, technologies and distribution networks to serve rapidly expanding domestic markets. “Emerging-market companies are increasingly delivering solutions designed specifically for emerging-market consumers,” Buckler concludes. “That ecosystem is becoming far more important in emerging markets today, because the companies plugging into that fully understand emerging-market demand.”
This article is part of HedgeNordic’s “Rethinking the 60/40 Portfolio” publication. This article is a paid promotion by Baillie Gifford. The article can in no way be seen as any investment advice or any other kind of recommendation.
