Any other business: your Disruption Week 2025 questions answered

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Emerging markets: doing more with less

Why are AI fears affecting the markets?

AI has become a dominant investment theme. This year we’ve seen hundreds of billions of dollars committed to AI-related infrastructure, primarily by large US technology companies.

With such scale of investment, it’s natural that markets are grappling with how to value the long-term return and some have questioned whether we are in ‘bubble’ territory.

In developed markets, this has caused a rise in the valuations of a handful of mega-cap AI stocks. By contrast, in emerging markets we don’t see the same concern. Valuations remain far more modest, even for companies at the heart of the AI supply chain.

Firms such as TSMC, Samsung, and SK Hynix trade at a fraction of US peers’ multiples despite strong earnings growth and the world’s increasing reliance on their technologies.

In our view, while AI is undoubtedly a transformative force, the bubble narrative doesn’t necessarily apply to the irreplaceable semiconductor hardware suppliers in emerging markets.

Given MercadoLibre is one of your largest holdings, and your continued conviction in the firm, why was that your largest sell in Q3 2025?

MercadoLibre remains a high-conviction holding in the strategy. It remains a large position and trimming during the quarter reflected strong share price performance rather than a loss of conviction.

How long might it take the EM advantage of not being encumbered by legacy systems to flip to these new systems actually becoming legacy systems, as technology moves on?

Technology inevitably moves faster than we expect. But one of the advantages for many emerging market companies is that they’ve been able to leapfrog legacy systems, as Alice Stretch discussed during the webinar.

Rather than modernising old infrastructure, they’ve built their own systems from scratch, often turning local constraints into global competitive strengths.

What matters most isn’t necessarily how quickly a certain technology becomes ‘legacy’ itself though, but a company’s capacity to keep adapting as technology evolves. The most successful firms continually reinvest in innovation and people to stay relevant.

We see this mindset across our holdings. MercadoLibre has expanded from online retail into payments and advertising. Nubank is reshaping Latin American finance with a fully digital model that bypasses traditional banking infrastructure. Mobile World in Vietnam has evolved from selling phones to running one of the country’s largest grocery chains, using its supply-chain technology to stay ahead. Even in newer areas such as autonomous driving, companies like Pony.ai are using real-world complexity as a source of innovation advantage.

Their adaptability gives us confidence that as technology moves on they’ll move with it.

Why is China still classed as an emerging market? And more broadly is the term still the most apt description for countries that have developed so much in the past couple of decades?

Broadly speaking, an emerging market investment strategy focuses on economies and financial markets that are still developing, seeking to benefit from growth potential that can outpace that of more established markets. We recognise, though, that the definition can be open to interpretation.

China remains classified as an emerging market largely for structural reasons. Its capital account is not fully open, the state continues to play a significant role in the economy and access for foreign investors is still managed rather than fully liberalised.

For index providers such as MSCI, those features mean it continues to sit within the emerging market universe. From a practical standpoint, we follow that MSCI definition. But we can also invest in companies that generate the majority of their revenues or assets in emerging economies.

The term itself has indeed become less meaningful over time. It was first coined in the 1980s as a convenient way to describe economies opening up to international capital. Four decades on, the range of countries captured by that label is vast.

It includes advanced industrial economies such as Taiwan and South Korea alongside developing nations like India and South Africa.

Ultimately, we don’t view emerging markets as one homogenous set, but as a collection of individual companies capable of creating value over long periods of time. Many of these so-called emerging markets are no longer catching up with the developed world but they are increasingly among the driving forces of global growth and innovation.

Stepping back, perhaps regardless of how ‘useful’ EM still is as a concept today, the most relevant point is whether investors are adequately exposed to the great growth companies that are emerging, and increasingly leading, from these markets.

As Alice Stretch mentioned, almost three quarters of the global funds are still underweighting emerging markets.

It’s our contention that this will change in the coming decades.

Please can you explain why a weak US dollar is often seen as a good thing for emerging market stocks?

A weaker US dollar has historically been supportive for emerging market equities, largely because of how global capital and trade are structured.

For emerging market countries and companies that borrow in dollars, a weaker currency reduces the local-currency cost of servicing that debt. This tends to ease financial conditions and often frees up capital for investment and growth.

At the same time, a softer dollar typically encourages investment flows back into emerging markets. Investors who had sought the perceived safety of US assets during periods of dollar strength are usually more willing to redeploy capital into higher-growth regions when currency pressures ease.

A weaker dollar can also boost export competitiveness. Many emerging economies remain major exporters of goods and commodities priced in US dollars. When the dollar falls, their exports become cheaper for foreign buyers, improving trade balances and, in turn, supporting corporate earnings.

It’s also worth noting that emerging markets are gradually becoming less dependent on the US dollar. Intra-regional trade is increasing, and a growing share of it is now settled in local currencies rather than the dollar.

 For example, some energy and commodity imports between Asian and Middle Eastern economies are increasingly being priced and paid for in local currency. This creates a positive feedback loop: as more trade is conducted regionally and in domestic currencies, emerging economies become less exposed to fluctuations in the dollar, which in turn supports greater financial stability and confidence in local markets.

Overall though, the general pattern remains that a strong dollar tends to tighten liquidity conditions across the developing world, while a weaker one creates a more favourable backdrop for growth.

Emerging markets still have a strong growth story, but valuations in a lot of places are already stretched. Is the real edge how managers decide when it’s still worth paying up for growth? Are investors starting to push back on the ‘growth at any price’ mindset?

EM has been one of the best-performing asset classes this year, helped by strong earnings from leading companies, renewed optimism towards China and a weaker US dollar. That strength has inevitably pushed valuations higher in some areas.

However, many parts of the universe are trading below their long-term averages. For example, parts of China and South Korea are still trading below their historic averages despite the recent rally.

In Latin America, too, we continue to find strong structural growth and reasonable valuations, particularly in areas linked to the energy transition and financial innovation.

In contrast, valuations in the Indian market continue to appear stretched and this is one area we remain underweight.

So while headline valuations across emerging markets have risen modestly, the picture underneath is highly varied. This is where an active, long-term approach adds real value.

We focus on companies with durable advantages and the ability to compound value over time, while staying mindful of price. Investing in these markets for over 30 years has taught us that selectivity rather than a view on short-term valuation trends remains the key to success in markets like these.

For our own EM strategies, despite portfolios being forecast to grow earnings faster than the index, the valuation (price/earnings ratio) remains flat or only moderately above that of the index. In other words, we are not asked to pay a high price premium to own the ‘growth premium’.

How do you balance your long-term thinking and holding periods with the dynamism and fast-changing macro and geopolitical landscape of EM?

We think long-term investing and the fast-changing nature of emerging markets go hand in hand. The pace of change is precisely what creates opportunity, provided you can distinguish between what is noise and what is genuinely transformative.

We don’t try to predict or react to every political or macro event. Instead, we focus on understanding the structural forces that shape how economies and companies evolve over the years ahead. That might include shifts in demographics, technology or consumer behaviour. When these transitions happen, they tend to unfold over long periods, which suits our investment horizon. Our edge often lies in ignoring the short-term noise.

Our five-year time frame gives us the space to look through volatility but still be curious and adaptive when the evidence suggests that something more fundamental is changing. It is why we spend time on the ground, speaking not only with company founders and management teams but also with academics, industry experts and policymakers. Engaging with people outside the financial world helps us understand how change is likely to unfold, and how the companies we own might adapt to it.

As a team, we regularly debate these insights to identify potential inflection points and ensure we are early to genuine, lasting opportunities.

In practice, that balance means selecting and holding companies with strong resilience and adaptability through periods of uncertainty when the long-term case remains intact, while remaining alert to shifts in regulation, governance or business models that might alter the investment thesis. TSMC is a good example. It has been held in our portfolios for more than 20 years and, over that time, has faced shifting political conditions and industry cycles. Yet its ability to innovate, scale and invest ahead of demand has driven long-term growth.

That combination of adaptability, curiosity and endurance is what we look for across emerging markets.

Can emerging markets technology compete against the developed counterparts and how do you see revenue generation geographically changing over the next 10 years?

Emerging markets are no longer simply catching up technologically: in many areas they are leading and leapfrogging their developed market peers.

As Alice Stretch mentioned in her conversation, companies such as TSMC underpin the global semiconductor industry, CATL dominates the global battery supply chain, and businesses such as Pony.ai, MercadoLibre, Sea Limited and Nubank are reshaping mobility, commerce and financial services across their regions.

These are not imitators but innovators with world-class technical capability and scale.

At the same time, the geography of revenue generation for many EM companies is changing. For decades, much of the growth in EM (in technology and other sectors) was driven by exports to developed markets. Today, these revenues are increasingly domestic.

For example, China’s retail sales are 10 times more than their exports to the US and 75 per cent of listed Indian companie revenues are domestic.

What we are seeing is rising incomes, expanding middle classes, rapid digital adoption and investment in data infrastructure that is creating large and dynamic home markets for many businesses.

As such, across many EMs, local platforms now dominate in areas such as ecommerce, social media, payments, electric vehicles and gaming, while regional champions in areas such as semiconductors and clean energy are building diversified revenue streams that combine domestic demand with global competitiveness.

Over the next decade, we expect this domestic consumption to only continue, making emerging markets even less reliant on external demand and more self-sustaining.

What’s the role of sustainability in how you invest in emerging markets? We acknowledge they are in a different place of maturity, not necessarily behind the curve as you mentioned!

Sustainability and governance are integral to how we invest in emerging markets. Our investment process is founded on the long-term ownership of growing companies, and while businesses that engage in practices harmful to society or the environment may generate attractive short-term returns, such behaviour is unlikely to create enduring value over the time periods in which we invest.

As you note, emerging markets are not necessarily behind the curve but are simply at different stages of maturity, and that context matters.

Our role is to understand where each company sits on that journey and to assess whether it is improving.

Our Senior ESG Analyst works closely with portfolio managers to ensure that sustainability considerations, where appropriate, are embedded in our investment process. 

We assess each company on its own merits, also analyse the political, social and regulatory environments in which companies operate, rather than applying a rigid framework designed for developed markets.

In practice, this means we look beyond headline ESG scores or disclosure levels, which often disadvantage emerging market companies.

We focus on the direction of travel and seek out businesses showing genuine intent and capacity to improve their sustainability and governance.

Progress, rather than perfection, is what drives long-term value creation for both shareholders and society.

How do you factor political risk into your investment decisions?

While our process is primarily ‘bottom-up’, we are sceptical of anyone who invests in emerging markets and believes they can completely ignore the overarching macroeconomic and policy environments.

Macro factors can often overwhelm the micro, so we must be at least ‘macro aware’ when making the investment case for bottom-up stock picks. This is particularly important as we focus on making hard currency returns for our clients.

When investing in markets where institutions are less mature or policy can shift rapidly, we focus heavily on alignment. This includes alignment between minority shareholders and management, but also between business owners and the broader socioeconomic objectives of the country they are operating in. Companies that operate with, rather than against, policy priorities tend to be more resilient.

Our analysis also increasingly considers the geopolitical dimension, assessing how cross-border tensions or global policy shifts could alter the opportunity set.

Our understanding of political and policy risk is strengthened by the depth of our research network. We regularly draw on insight from our Shanghai office for developments on the ground in China, as well as from on-the-ground company meetings with companies, local policymakers, academics and independent experts. These perspectives help us assess both the practical and behavioural impact of political developments and they often challenge consensus narratives.

China is one example where in recent years, harsh lockdowns, regulatory clampdowns and property sector woes heightened concerns about the direction of change in the world’s second largest economy. The fundamental economic picture has been further muddied by geopolitics and sentiment. Therefore, the risk-adjusted return on investment in China has changed markedly in recent years. But change and disruption bring opportunities as well as risks. That’s why we believe fundamental analysis is key.

We have seen similar dynamics elsewhere. Brazil, for instance, has experienced significant political swings and macro volatility, yet companies such as MercadoLibre have continued to compound earnings in hard-currency terms.

Overall, our research framework, experienced investors and use of third-party insight in areas of geopolitics, policy and macroeconomics help focus us on the opportunities at the company level, while providing context to construct portfolios that address country and sector risks. 

Explore our complete Emerging markets coverage from Disruption Week 2025.

Europe’s next generation of winners

Which stock do you think has the greatest potential upside, over say 10 years? Not asking for guarantees of course!

I wouldn’t want to highlight any individual stock in isolation, since the stocks that offer the highest upside in absolute terms usually also come with high idiosyncratic risk, which should be mitigated by diversification in a portfolio context.

Having said that, our largest positions include Topicus (a consolidator of niche software platforms), Ryanair (the budget airline), and Vend (a collection of online marketplaces) as we believe that these offer strong risk-adjusted return potential over the long term (which we define as over a time horizon of five years or more). I would also add ASM International, which I discussed in the interview, to this list.

How does productivity in Europe, both in terms of productivity per hour worked, also in terms of total hours worked per person, compare with other regions around the world?

European productivity overall is about 10-25 per cent below the US, though this varies widely by country and by industry.

Northern and Western Europe (eg, Switzerland, the Netherlands, France) are the closest to the US in terms of productivity per hour worked, but workers in these countries typically work fewer hours than the US, and particularly Developed Asia, owing to a greater number of statutory holidays.

The productivity gap between Europe and the US is also the result of a Total Factor Productivity gap, which could be explained by slower adoption of new technologies and lower market flexibility.

However, we don’t tend to focus on aggregates like these in our investment process because we are bottom-up investors, meaning that we invest in individual businesses, not in Europe as a whole. Exceptional businesses like ASML or ASM will have high productivity wherever they happen to be based.

Now that the UK is passing legislation to end in vivo drug testing, what will be the impact on UK Big Pharma?  Are you likely to change your investment approach to investing in UK companies?

We don’t invest in UK companies on our strategy as Baillie Gifford has a separate UK-focused strategy. Having said this, I suspect that the UK’s decision to end in-vivo drug testing will simply move R&D elsewhere (eg, Continental Europe), possibly with negative consequences for its life sciences sector.

You own zero in luxury goods yet LVMH, Hermès and Richemont are outstanding growth businesses. [Why?]

We do in fact own several luxury stocks – LVMH, Richemont, and Moncler. We have admired Hermès from afar for many years but have not yet been able to get comfortable with its high starting valuation (Ferrari falls into a similar category).

Our colleagues on Baillie Gifford’s Long Term Global Growth (LTGG) strategy have, by contrast, owned Hermès for many years and have done very well out of it. Hermès continues to be a subject for lively debate between our strategies.

Can you talk about the unlisted companies please? Are you buying any more?

Over the past decade or so, we’ve seen more and more businesses choosing to stay private for longer. This is for a variety of reasons and is in some ways a good thing, since it allows founders to think longer term about their businesses without facing the spotlight glare of the public markets.

However, it does mean that public market investors are deprived of the returns that can come from owning exceptional private businesses.

Fortunately, Investment Trusts allow us to take positions in late-stage private businesses and thus offer public market investors exposure to their returns.

We remain open to other opportunities in private markets and work closely with our in-house private companies investment team.

Mid cap winners seem underrepresented like Exail Technologies in robotics and Cembre in cables for data centres [Why?]

We own many small and mid-cap businesses on our strategy; in fact, our portfolio is markedly skewed towards the €1-10bn end of the market cap spectrum. Examples include the Italian IT consultancy Reply, Polish online marketplace Allegro, and specialty chemicals distributor IMCD.

We also own the French cables business Nexans, which is transitioning from lower margin businesses towards higher value-add activities in deep-sea cables.

The AI boom has benefitted companies like PSI Software in Germany and Pfisterer. How have you played the AI boom?

The biggest impact of the AI boom in Europe so far has been felt by the semiconductor businesses, so ASML and ASM International are the biggest beneficiaries of this in our portfolio so far. AI is also having an indirect impact on other holdings, e.g., Kingspan, which makes construction materials, including for data centres

Watch and read our full Disruption Week 2025's Europe coverage.

Private Companies: getting ahead of the crowd 

What proportion of unicorns remain above the $1bn valuation, for example, one year later? What proportion of unicorns does Baillie Gifford’s Private Companies Team invest in?

As the questions suggests, not all unicorns will continue to thrive. In fact, the industry-wide loss ratio for private growth is around 20 per cent, and around 25-30 per cent of venture capital backed tech companies are not growing. That is why selectivity is crucial. In a typical year, we have close to a thousand company conversations, which results in only about 10 new investments.

What we look for are signs of growth that is durable: a large potential market, and a competitive edge supported by the company’s business model, leadership and culture, together with capital allocation that drives strong returns on equity.

Stream the Private Companies session and read our write-up from Disruption Week 2025.

Risk Factors           

The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in November 2025 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.

All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.

The images used in this communication are for illustrative purposes only.

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