Emerging Markets: investor letter Q1 2026

As with any investment, your capital is at risk.

‘“There must be some way out of here,” said the joker to the thief.’ - Bob Dylan  

We have been investing in emerging markets for over 30 years, and experience has taught us that it is rarely a comfortable occupation. Just as the asset class was gaining real momentum, recent events in the Middle East opened up a Pandora’s box of challenges and uncertainty.

However, many of the underpinnings for that momentum remain: most emerging markets countries are politically stable; most have run conservative fiscal policy and orthodox monetary policy over the last decade or more. Most of the ‘picks and shovels’ of AI are made in Asia, while many of the raw materials necessary for the energy transition are found in Africa and Latin America.

Increasingly the financial and consumer needs of burgeoning middle classes are being met by local champions attuned to local needs. These underpinnings have not been altered by the conflict across the Gulf except perhaps for the need for long-term energy security, which has almost certainly risen in most countries’ list of priorities. This development also has plenty of scope to provide long-run investment opportunities for emerging markets companies.

As things stand, our clients’ portfolio is relatively well positioned, though we are not complacent. Obviously, the broader Energy positions have done well (Petrobras to CATL).

The portfolio does not have any holdings in the Middle East, which is obviously most directly impacted by the current conflagration. In the spirit of transparency, this was not because we have a crystal ball, but because for some time we have struggled to find attractive bottom-up opportunities.

The portfolio is also underweight India, which is the world’s third-largest oil consumer and importer, with import dependence reaching nearly 89 percent of its needs in early 2026 due to high demand and limited domestic production. This was a long-standing portfolio construction decision and because for some time we have struggled to find attractive companies at attractive valuations.

Meanwhile the portfolio is overweight some significant oil exporting countries, such as Brazil, Kazakhstan and Mexico. Meanwhile, China is estimated to be holding over 1 billion barrels of oil in its strategic reserve and has a greater mix of alternative energy sources than any other major economy. Stability and security are lynchpins of its latest Five-Year Plan.

Therefore, if the conflict in the Gulf remains relatively short-lived, we remain largely comfortable with portfolio positioning. However, we are giving some thought as to the repercussions of a protracted war.

What if oil prices stay high for an extended period? What happens if higher inflation starts to become embedded? How will central banks respond to a higher inflationary environment?

Our Investment Analytics and Investment Risk teams have stress tested the portfolio through various scenarios and we do understand where the vulnerabilities may arise. For example, higher interest rates are seldom helpful for long-duration growth stocks. However, high profitability and earnings quality suggest the growth stocks held in the portfolio have genuine pricing power, partially offsetting duration vulnerability. Additionally, the portfolio has, in aggregate, very limited leverage suggesting some protection to higher interest rates.

The upshot of the war is that governments around the world are focusing on ‘resilience’ in all its forms. Recent geopolitical tensions highlight vulnerabilities in global energy supply routes, notably the reliance on the Straits of Hormuz, prompting countries to consider pipeline diversification to alternative ports and regions like the Indian Ocean, Red Sea, and Mediterranean.

This shift could lead to greater investment in alternative hydrocarbon suppliers such as Brazil, Guyana, Indonesia and Central Asia, with security and reliability increasingly outweighing price considerations. Concurrently, renewable energy sources – including solar, wind, nuclear, and advanced battery storage – are poised to gain increased emphasis.

Hydrogen technology is emerging as a strategic priority for countries like Germany and Japan to reduce reliance on Chinese-dominated battery supply chains, driven by national security rather than purely economic concerns. Beyond energy and security, reliability concerns will also extend to areas like food and fertiliser supplies, reshaping investment patterns and national policy priorities globally.

Aside from the war, the portfolio’s exposure to AI is also potentially subject to volatility. However, we do believe that any air pocket in AI stocks is likely to be caused by delays in deployment rather than a lack of final demand.

It is a theme we continue to invest in, though have been careful over the last 12 months to recycle some of the profits into other, more idiosyncratic areas.

Moreover, semiconductor behemoths like TSMC and Samsung Electronics (held continuously in our clients’ portfolio for over 15 years) typically trade on lower short-term valuations than their US customers while also retaining an element of diversification: AI is undoubtedly the driver of recent financial and share price performance, but both companies also provide chips for smartphones, tablets and PCs as well as for automotive applications.

In addition, the tech sector seldom stands still, so the team has been looking at new developments, such as photonics, and the companies with sufficiently adaptable and agile cultures that could benefit from these advances.

As long as the war rages, it is likely that markets will remain “risk off”. In such an environment it is unlikely that emerging market equities will deliver much in terms of absolute performance in the short term.

However, long term, the solid economic underpinnings of many emerging market countries remain in place and are likely to become increasingly more apparent in a time of stress. This is especially the case if inflation ratchets up a notch. China in particular would probably welcome a higher inflationary environment.

As governments increasingly start to focus on ‘resilience’ in all its forms, it is likely that some of the best investment opportunities will appear in Emerging Markets, as new supply chains emerge and ‘just in case’ increasingly replaces ‘just in time’ across a number of commodities and products.

This will require more ‘stuff’ both for inventories and for the infrastructure to warehouse and transport it. There must be some way out of here. There is and it is good for the long-term future for emerging markets.

Emerging Markets

Annual past performance to 31 March each year (%)

Annualised returns to 31 March 2026 (%)

Source: Revolution, MSCI. US dollars. Net 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 April 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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