Emerging Markets: investor letter Q4 2025

As with any investment, your capital is at risk.

 

In Scotland, this year’s festive celebrations were buoyed by our national football (soccer) team qualifying for the World Cup, a request on Santa’s list for many a child since that feat was last achieved in 1998. This was certainly one of the bigger surprises of 2025. The tournament also provides a useful perspective on how profoundly the global economic landscape has shifted. Unlike Scotland’s last appearance, when emerging markets (EM) firms were absent from the sponsor roster, this year’s tournament is dominated by names such as Saudi Aramco, Hyundai-Kia and Lenovo, with Chinese brands Mengniu and Hisense taking their place on the bench alongside Bank of America and McDonald’s.

The growing prominence of emerging market companies on a global stage is not simply a story of scale. It reflects deep structural shifts in demographics, consumption, innovation, and governance – trends that are reshaping the balance of global growth. From South Korea’s memory giants to Taiwan’s globally dominant semiconductor manufacturing ecosystem and Chinese platforms and autonomous driving leaders, EM is home to companies at the forefront of technologies that will shape the decades ahead. And yet despite contributing more than half of the world’s GDP and even more of its future growth, emerging markets still comprise little more than 10 per cent of MSCI ACWI. Might 2026 be the year investors begin to close that gap?

After strong year-to-date absolute returns, particularly relative to developed markets, the final quarter was more measured. Positive momentum was driven by the continued evolution of the AI investment cycle (with notable strength in Korea), a resurgence in commodities, and a deepening sense that emerging markets are quietly assuming a more central role in the world’s economic architecture. However, this was balanced by growing concerns about valuations in the technology space, index concentration, a weaker China and the ever-present uncertainties of global geopolitics.

China offers perhaps the clearest example of how policy direction, innovation capacity and sheer scale can combine to reshape global industries. Its leadership in telecoms and electric vehicles reflects the priorities of earlier policy cycles, but attention is now shifting. The newly released 15th Five-Year Plan places significant emphasis on artificial intelligence, computing infrastructure, semiconductors and smart manufacturing – aiming to harness technological progress to drive growth. Few may have heard of companies such as AMEC, Naura, YMTC, CXMT, Minimax and Unitree, but they’re companies from across China’s tech stack that we’ve met recently as we go beyond China’s leading platforms to assess which emerging areas look both technologically and economically credible.

While tariffs, trade tensions and geopolitical headwinds can obscure the scale of China’s domestic opportunity, the combination of high-quality businesses and compelling valuations remains hard to ignore. Luckin Coffee’s data-centric coffee revolution has been part of Starbucks’ troubles in China; the latter put itself up for sale during the quarter. This echoes Uber’s sale to Didi amidst fierce domestic competition. With consumption now raised from an economic to a political priority, the future opportunity remains large.

At approximately $23tn, Chinese household deposits are far larger than those in the US, and yet the Chinese stock market value is less than a third of those in the US. Household confidence is therefore an important driver of China’s growth; releasing excess savings should be beneficial both for consumption and for the stock market. While regulation has been something of a dirty word in China in recent years, the China Securities Regulatory Commission’s latest proposals instead reflect a quiet but important upgrade in market governance, aligning regulatory reform with the ambition to deepen domestic capital markets. According to China governance specialists, ZD Proxy, “the significance of this move cannot be overstated”.

Regulatory and governance reforms have also buoyed sentiment in Korea, one of the world’s best-performing markets this year, by raising hopes for improved shareholder returns. For growth investors, this has created a dilemma: many of the biggest beneficiaries of Korea’s ‘Value Up’ programme have weaker governance and low growth profiles, placing them outside our remit. However, we see potential for hidden value to be unlocked at Hyundai Glovis, the Hyundai Group’s logistics arm, which is a new holding and adds to exposure to the wider Hyundai Group.

In Korea’s memory semiconductor space, strong operational performance at Samsung Electronics and SK Hynix meant both were contributors to portfolio returns. The significant upgrades to earnings forecasts have meant that, despite rapid share price appreciation, valuations still look attractive in a global context. It’s no surprise to see growing interest from global and international funds!

Elsewhere, despite continuing to report strong growth, the end of the year was challenging for ecommerce leader Coupang following a major data breach. We expect that its value proposition of delivering cheap goods very quickly will ensure it retains its strong reputation with its customers, but we are watching the situation closely.

While AI has captured most of the headlines, we’re very aware of the importance of diversification when it feels like the thundering herd is racing towards an ever-narrowing gap. Consistent with portfolio activity for much of this year, the diversity of new purchases over the quarter is reflective of the breadth of growth opportunities across emerging markets. New holdings include Axia Energia (formerly Eletrobras), Brazil’s largest electricity company and Vietnam Military Bank (which, despite its name, is privately owned and managed).

These purchases were funded from the complete sales of Li Ning and Haier Smart Home, where we believe we have better exposure to China’s consumption recovery, and Indian companies Hyundai India and ICICI Prudential Life Insurance. Reductions were made to Polish ecommerce platform Alleg ro, where management change clouds conviction, Axis Bank in India, where we hold other financial names with higher conviction, and lithium miner SQM, which performed very strongly over the quarter.

Beyond AI, the commodities sector has been in focus. The combination of a US easing cycle and a political will for a weaker dollar could be very positive for gold and the broader precious metals complex. We participated in the IPO of Chinese miner Zijin Gold, which was established to consolidate and operate Zijin Mining’s international gold assets. We’ve met the parent company a number of times and visited their mines in recent years.

In lithium, easing upstream cost pressures and robust downstream battery-storage demand supported a sharp price recovery, which benefited the portfolio’s position in Chilean miner SQM, acquired earlier this year. Our attendance at a lithium conference in China during the quarter reiterated the optimistic outlook.

Similar trends are evident in the copper market, where contract negotiations point to structurally tight supply and rising prices. With planned copper supply expected to meet only 70 per cent of projected 2035 demand, we see a significant structural gap driven by electrification and AI data-centre expansion that supports our holding in First Quantum Minerals.

In India, we retain an element of caution. After a number of years of strong performance, the MSCI India index has returned just 4 per cent this year, against MSCI EM up 34 per cent (in USD). Perhaps that’s a reason why domestic investors are turning to IPOs and why foreign investors have sold over US$20bn in Indian equities this year? We did look at the IPO of the ecommerce platform Meesho and will have an eye on the proposed listing of India’s largest mobile telecoms giant, Jio, being part of Reliance Industries, which is in your EM portfolio. However, our focus remains on company fundamentals, where the longstanding struggle to find Indian names that compare favourably to those stocks we can purchase elsewhere remains the case.

In contrast, Brazil continues to stand out as one of the more attractively valued major emerging markets. While macro headlines point to slowing growth and the approaching election cycle may muddy the waters, they risk obscuring an improving underlying picture, particularly as the US administration’s renewed interest in strengthening economic ties with Latin America adds a further layer of medium-term support. Recent commodity price strength provides support for export revenues, and interest-rate cuts expected in the year ahead should gradually feed through to corporate activity and consumer demand.

Brazil remains the largest country overweight position, though over the year, exposure has tilted away from energy (Petrobras) and towards the domestic opportunity. In addition to the purchase of Axia Energia, we also added to MercadoLibre over the quarter.

 

Performance

The MSCI Emerging Market Index rose slightly over the fourth quarter, capping what was a very strong year. At the country level, Korea and Chile drove quarterly performance on the back of strength in semiconductors and commodities, respectively. However, there was significant divergence across individual markets, with China weak in absolute terms and positioning in Brazil impacting relative returns.

One theme worth picking out at the stock level has been consumer discretionary companies investing for future growth. We tend to welcome this as it usually means doubling down on competitive strengths. This can be at odds with the market in the short-term, though, where the focus is instead likely to be on short-term margin pressures. Some of these companies yo-yo between top and bottom contributors from quarter to quarter. This serves to remind us that it is important not to draw conclusions from short-term performance: our investment horizon remains steadfastly five years and beyond.

We’re conscious that performance over that longer time period is not where you’d like it to be, though we are very encouraged by recent improvements across a broad swathe of the portfolio and are therefore seeing a clear path to recovery in the longer-term numbers. This quarter, we’ve seen a reversal in fortunes for big-index constituent Alibaba. This is not held, and that has been painful for relative returns over the year, but a positive thing over the quarter. We remain sceptical about the long-term competitive position of the company in its key verticals and are happy to remain on the sidelines. A combination of unexpected margin compression and uncertainty around return timelines for new initiatives has led to significant earnings downgrades over the course of the year. It reported third-quarter net income down 72 per cent YoY.

Samsung Electronics was again a top contributor to performance. This time last year we were writing about the company in a more apologetic light. Now, it is forecast to grow operating profits by over 150 per cent in 2025. Samsung is seeing strong demand across the board, has the capacity to negotiate with customers and is prioritising its customer and application mix to maximise profits. It is projected to regain the number one position in the global DRAM (dynamic random access memory) market, driven by soaring demand for high-performance AI memory and a sharp rise in conventional DRAM prices. Given disciplined capex throughout the industry, Samsung anticipates that memory shortages will persist well into 2027. Alongside Samsung, SK Hynix continued its strong performance as the clear winner to date in high-bandwidth memory, reporting a 62 per cent YoY growth in profits in Q3 and announcing that all of its DRAM, NAND and high-bandwidth memory capacity is fully booked for 2026.

SQM is a Chilean chemical and mining company with extraction rights in the Salar de Atacama, which is the world's largest and lowest-cost lithium deposit. Its share price has been strong amid rising market expectations for electromobility and energy storage systems (ESS) demand to support price recovery and volume growth. SQM achieved record lithium sales volumes in the third quarter, up 43 per cent YoY, and received approval from China's antitrust regulator for a joint venture that will enable long-term lithium production planning in Chile through 2060. It should also help SQM to increase authorised production quotas between 2025 and 2030.

For the second quarter running, MercadoLibre detracted from performance. We have a clearly differentiated view from the market here, perhaps related to our investment time horizons. While its investments in logistics, fintech expansion, and customer acquisition can weigh on short-term margins, we view these as strategically important and value-accretive for long-term growth. We are fortunate for our access to the incoming CEO at a time of management change and retain our focus on longer-term trends: MercadoLibre recently recorded its 27th straight quarter of 30 per cent or higher revenue growth (in USD terms), the only public company in the world to do so.

SEA Ltd also performed poorly in share price terms, despite revenue and profits growing across its key segments. Near-term consensus estimates were revised down to reflect lower ecommerce margins as Shopee prioritises growth investments over immediate profitability. While that makes sense given the high potential in its markets and the stage of its business, it wasn’t received well by the market. The company has a strong balance sheet (announcing the company’s maiden $1bn share buyback programme in November) and remains confident in its long-term prospects.

This year has seen a strong rerating of the EM asset class as a whole, and yet the discount to developed markets remains significant. Our long-term horizons require us to consider the structural shifts that are playing out across economies, sectors, and regions. From questions around the extent of AI in the real world and on stock markets, to questions about portfolio resilience in a more multipolar world. This reinforces our enthusiasm for the opportunity set in emerging markets and challenges its under-representation in global portfolios.

Despite its challenges, emerging markets have given investors a few reasons to raise a glass this year. We’re seeing a diverse range of growth drivers, operational performance is encouraging, and valuations remain attractive. As we look to the year ahead, there are good arguments to believe the mood will stay merry for emerging markets if perhaps not for the Scotland football team!

 

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Emerging Markets

Annual past performance to 31 December each year (%)

	2021	2022	2023	2024	2025
Emerging Markets All Cap Composite (gross)	-7.8	-26.5	15.1	6.9	40.6
Emerging Markets All Cap Composite (net)	-8.5	-27.1	14.2	6.1	39.4
Emerging Markets Leading Companies Composite (gross)	-7.5	-25.4	11.9	6.6	35.3
Emerging Markets Leading Companies Composite (net)	-8.3	-26.0	11.0	5.8	34.2
MSCI Emerging Markets index	-2.2	-19.7	10.3	8.1	34.4

 

Annualised returns to 31 December 2025 (%)

	1 year	5 years	10 years
Emerging Markets All Cap Composite (gross)	40.6	3.2	10.5
Emerging Markets All Cap Composite (net)	39.4	2.4	9.6
Emerging Markets Leading Companies Composite (gross)	35.3	2.2	10.8
Emerging Markets Leading Companies Composite (net)	34.2	1.3	9.8
MSCI Emerging Markets index	34.4	4.7	8.9

Source: Revolution, MSCI. US dollars. Returns have been calculated by reducing the gross return by the highest annual management fee for the composite. 1 year figures are not annualised.

Past performance is not a guide to future returns.

Legal notice: MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

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 January 2026 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

Potential for Profit and Loss 

All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.

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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