View transcript
<p class="MsoNormal"><strong>As with any investment, your capital may be at risk.</strong></p>
<p> </p>
<p><strong>Roderick Snell</strong>: Well, look, good afternoon, everyone. It is great to be here today. And I do really mean that, because on a recent business trip to Asia, I was actually nearly arrested by a Chinese policeman, and I didn’t think I would make it. Now, I should stress, I wasn’t doing anything wrong. I was actually test-driving a prototype of a new, fully autonomous BYD car. And there I was, in the back, going along a busy dual carriageway, no driver, when we suddenly hit a pigeon, which got sucked into these enormous futuristic air vents.</p>
<p>The car, filled with feathers, went into emergency lockdown, and I was trapped inside as traffic whizzed by. Now… Eventually, a traffic officer did arrive, but given my rather poor Chinese and his growing frustration that this foreigner wouldn’t get out of his feather-filled car, he started to raise his baton. I thought this was the end, but luckily, a BYD assistant did turn up and defuse the situation. So thankfully, I have made it back here today to talk to you about emerging markets. And I’m genuinely excited to do so, because there are significant changes happening in the region at the moment, and I believe we could be on the cusp of a significant bull market, possibly similar to the early 2000s, when emerging market returns trounced those of any other market.</p>
<p>So let me tell you why. So, we all know who this is. Tom Brady, arguably the greatest quarterback in history. I was told this morning he only ever made one mistake, not joining the Chicago Bears. But in 2000, in the 2000 draft, sorry, he was the 199th pick. He was almost left out.</p>
<p>Almost no one wanted him. I am seeing some confused faces. What on earth is this strange Englishman doing talking to us about American football? Well, I believe emerging markets today are like picking Tom Brady in the 2000 draft. Back then, he was unloved. He was the 199th pick.</p>
<p>He was stronger. He was far better than markets realised. And he was accelerating. New team, his career took off. So unloved, stronger, accelerating. And purely by chance, the acronym for that is USA.</p>
<p>And this is emerging markets today. We can just swap the wording around. Unloved. The emerging markets are under-owned and very cheap. It’s stronger. The macro is fundamentally better than people believe, and it’s accelerating.</p>
<p>The backdrop’s improving, and EMs are gathering pace. So EM is the Brady Draft of 2000. And I’ll shortly go through these three key drivers. But first, there’s one question I’ve received more than any other this year. Have we already missed it? After all, emerging markets did outperform last year.</p>
<p>My answer to that is no, not at all. Sentiment is still really on its knees. And just look at flows. They’ve been terrible for years, and last year was no exception. About $64bn came out of emerging markets, about 6 percent of AUM. And asset managers are hugely underweight.</p>
<p>Two-thirds of global fund managers are underweight emerging markets. And actually, EM hasn’t really moved. This uptick is against a backdrop where emerging markets have underperformed consistently for 15 years. So no, we haven’t missed it. Barely anyone owns the asset class, and it’s underperformed for over a decade. So why will this change?</p>
<p>Well, it’s the Brady Draft. Let me run through the three key drivers. So first, it’s unloved. So emerging markets. The IMF reckons 90 percent of the countries in the emerging markets will grow faster than developed markets, yet they trade at record discounts. And the story’s the same if you look at positioning.<br>Asset allocations to emerging markets are at all-time historic lows. So this is an asset class that’s unloved, undervalued and distinctly out of favour. Secondly, stronger. And this is key, and here we really are talking about the macro. But if you expect me to be talking about widening deficits, picking up inflation, blowing out currencies, I’m not here to talk about Europe. Emerging markets, they have faced the most aggressive rate-tightening cycle in a generation, and the strongest dollar in 40 years.</p>
<p>And what’s happened? Nothing. And that’s hugely important. That’s about the worst backdrop you could have for emerging markets possible. And yet nothing’s really happened. There’s been no blowout.</p>
<p>If this happened at any other time in the past 30 years, money would have come out of emerging markets, and you would have had a financial crisis. Why not this time? For the simple reason that no money went into EM in the first place. Just look at the flows. Capital flows into emerging markets have been negative every single year for 12 years. We’ve been pariahs for more than a decade.</p>
<p>And that’s when emerging markets have had to become self-sufficient. They’ve actually behaved like developed markets used to. No QE, no money printing, sensible real interest rates. So on pretty much every metric you look at, emerging markets are more resilient than they’ve ever been. The last decade was the stress test, and EM passed. Accelerating.</p>
<p>And there’s one obvious question you should all be asking. If what I’ve just said is true, why on earth haven’t emerging markets done better? The answer is that for years, they faced two massive headwinds. China and the dollar. But both are starting to turn. And that’s big news.</p>
<p>This is Tom Brady arriving at the Patriots. This is the moment the story starts to accelerate. So I’ll start with China. So China has gone from being the biggest drag on emerging markets to potentially its biggest tailwind. And to understand why, you’ve got to go back to 2018, when the US started restricting semiconductor supplies to China, the start of a trade war. Now, Napoleon said, “Let China sleep, for when she wakes, she will shake the earth.”</p>
<p>Well, this woke China up. She was genuinely panicked. And her response was to de-Westernise her industrial supply chain. And she did that by taking her enormous domestic savings, and moving from property into industry. And that’s what you see here. Loans to property falling off a cliff, loans to industry surging.</p>
<p>And this is ginormous, by the way. You don’t normally see anything like this in any other country outside of wartime. Now, that drove two massive deflationary forces. Firstly, a brutal property crash. Prices falling for seven consecutive years, consumer sentiment decimated, and secondly, a surge in industrial capacity. Now, the world has very much focused on the bust.</p>
<p>And fair enough, China took a lot of pain. Property prices down 30 percent to 50 percent, consumer and equity markets crushed. But what the world is missing is what China built through that pain, a world industrial superpower. Autos are a great example of that. Five years ago, China didn’t export pretty much any cars. Today, it’s the world’s largest exporter of automobiles, and by quite some margin.</p>
<p>The quality and innovation, by the way, are amazing. I drove one in China that had a drone built into the roof that you could launch into traffic jams to see what was happening ahead. I didn’t risk that feature, not after Feathergate. And it’s not just in cars, from batteries, solar, data transmission, all sorts of areas. China’s not just caught up with the West, it’s very much leapfrogged. So, China, at great expense, great expense, believes it’s won the trade war.</p>
<p>And now, crucially, it’s able and is starting to focus back on its domestic economy. So it’s supporting property prices, it’s supporting markets, and it’s starting to stimulate. And this could be big. Household consumers in China haven’t really had anywhere good to put their money for years. Property, no. Stock market, no.<br>So it’s all just flooded into low-yielding bank deposits. About $23tn today. Now imagine what happens if just a fraction of that starts going back into equity markets. 10 percent of that, $2.5tn. It’s a vast sum. Your markets would go off the charts.</p>
<p>And then finally, we’ve got the currency. China has kept this incredibly low for years to support the exporters. And it is ridiculously cheap. It’s one of the cheapest assets in the world today. But if you’re now supporting your domestic economy, you want a rising currency. And that’s exactly what we started to see for the past several months.</p>
<p>And I think that’s probably a major policy shift and signal from China. So, the world is still very much focused on what broke in China, but is missing what China built through that, a world industrial superpower. And with policy now refocused back on the domestic market and the currency, that’s a very bullish backdrop. And secondly, you’ve got the dollar. Now, for 15 years, the only game in town has really been, well, you guys, America. And the dollar has acted like a giant hoover, sucking up liquidity from the rest of the world, which is a very challenging backdrop for EM.</p>
<p>But it’s done OK. No crisis. And that’s important, because if you can survive a dollar this strong, imagine what happens if that headwind starts to turn. Now, predicting what happens to currencies is a tricky game. But as someone from the UK, I do know something about depreciating currencies. And there are some structural reasons why the outlook for the dollar might be changing.</p>
<p>The administration wants a weaker dollar. It’s expensive, at a 40-year high. Deficits keep going out, et cetera. Plus, there are more alternatives to the dollar. About 25 percent of all China’s trade is now done in the RMB. And when you think that, what, 40, 50 percent of all EM trade is with other EM countries, it probably makes sense that that starts getting done in local currencies.</p>
<p>And this doesn’t need to be a big change. If the dollar just went down 10, 15 percent over the next three, four years, that would be a major inflection point. So that’s the big picture. Emerging markets are unloved, stronger than people think, and accelerating as major headwinds turn. It’s the Brady Draft of 2000. So, where are the opportunities?</p>
<p>Now, I’ve been investing in emerging markets for 20 years now, and the opportunity set is almost unrecognisable from what it used to be. Back then it was low-quality companies, cheap labour and commodity cycles. I think our biggest holding back then was Gazprom in Russia. That is still the view many people have of emerging markets, and it’s wrong. Emerging markets now sit at the very heart of the next global growth cycle. And they’re not just benefiting from global growth.</p>
<p>In many cases, they are enabling it. Emerging markets fuel the world. And there are four areas that we think matter most. The first is AI. So look, without North Asia, there is no global AI. Korea and Taiwan dominate the AI supply chain.</p>
<p>And it’s interesting, when I come here in the US, the debate seems to be, can AI make money? In Asia, it’s how much money? And the reason is that the Asian companies are the key picks and shovels at the critical bottlenecks. And they don’t care who wins, they will supply that critical infrastructure to anyone. So in Taiwan, TSMC is the only foundry that can make high-end AI chips. No TSMC, no NVIDIA.</p>
<p>In Korea, Samsung and Hynix dominate high bandwidth memory, arguably the critical bottleneck at the moment. GPU speeds have gone up about 10,000 times in the past decade, memory less than 100. So most of the time, your GPU is actually idle, waiting for more memory. That’s why Hynix has managed to sell out for the next two years and counting. And these players, they’re not just growing quickly, they’re generating excellent returns and big profits. You’ll probably be surprised when I tell you that the company likely to generate the biggest profits this year in dollars is not American.</p>
<p>It’s actually Samsung. And TSMC and Hynix will probably be in the top five as well. They’re also cheap. You’re probably paying half the multiples you would in developed markets. So, no Asia, no AI. In China, we’ve always discussed the macro.</p>
<p>We’re increasingly finding a lot of good stock ideas in the country. One example is domestic brands. One of the problems we used to have was that all the affluent brands were foreign, so the benefits would go overseas. Go to China today, speak to Gen Z, that’s no longer the case. It’s all about Xiaomi in smartphones, BYD in cars, and even in coffee. Luckin Coffee, which we own, has overtaken Starbucks to become the number one chain in the country.</p>
<p>About 25,000 stores. Growing like a weed, added about 7,000 last year, and it’s dirt cheap, like most things in China. So you can own China’s biggest coffee chain, growing faster than Starbucks, at a significant discount. They’re also actually just opening up in America now, and I do recommend their coffee, it’s excellent, although I would avoid their local concoctions. Some of their most famous specials include their famous cheese cappuccino, and their number one brand for a while was the spicy pork latte. Interesting if you can get your hands on it.</p>
<p>We’re also seeing globally dominant brands come out of China. I guess CATL is the largest battery player in the world, has on its own four times the capacity of all of North America. It’s not just a scale game, this. The industry has been a bloodbath competitively for years. These guys have managed to increase margins, generate returns in excess of 25 percent and increase their market share to 60 percent in China and 40 percent globally. So the TSMCs of batteries, if you will.</p>
<p>Now, China still dominates global supply chains, but the world is looking to diversify away from China. But the benefits aren’t really accruing in Ohio or Bavaria. They’re still very much staying in emerging markets. And Vietnam’s really the best example of this. Indeed, Vietnam is probably the best structural growth story of any country in all the emerging markets. The sad truth is that most emerging markets never emerge.<br>The only ones that have, Korea, Taiwan, China, they built up a successful export manufacturing base. Vietnam is doing that better than any other country in the world today. It’s the biggest beneficiary of China plus one. It’s also got a very exciting domestic growth story that’s worth keeping an eye on. Domestically, things have been very tough in Vietnam because of this man, Trung, who used to be the party leader. I would describe him as a miserable Marxist.</p>
<p>He didn’t care about business, and he put in a huge corruption clampdown called Operation Blazing Furnace, nicely titled, and it really led to a complete collapse domestically in the country. Now, sadly, he died last year, and he was replaced by a man called To Lam. This is not To Lam. This is Salt Bae, the famous celebrity chef, known for his $1,000 golden steaks. I’m sure Tim, our CEO, can tell us how they taste. But anyway, I put him in there for the simple reason that Toe Lamb was famously filmed eating one of these steaks during the corruption clampdown.</p>
<p>And that tells you something. He’s not a miserable Marxist. He’s all about money and business. And he’s come in and is completely changing the country. We’ve been in the biggest reforms we’ve seen in 40 years. They’ve got a 10 percent GDP growth target.</p>
<p>And it’s probably gonna be the fastest growing large economy, I would say, in the world over the next three to four years. It’s also being upgraded from frontier to emerging market status. So lots of people are gonna have to start looking at Vietnam. So if you can, worth looking at it now. And then finally, we’ve got raw materials and the physical economy. Now, the West would like to reshore, but much of the physical economy is now actually situated in emerging markets.</p>
<p>So copper, rare earths, batteries, chips, these have been viewed as low-value industries for decades. But now we’re starting to realise that actually they’re scarce, strategic, and actually very hard to rebuild. Look at rare earths. China has an absolute stranglehold on their processing. Or even copper. The US has to get the vast majority of its supplies from places like Chile.</p>
<p>So really, for the first time in my career, we’re starting to see emerging market companies with genuine pricing power. It’s not just about being the lowest-cost producer. And in many cases, they are the only producers of things that the world desperately needs. So EMs really do fuel the world. So to conclude, look, I’ve been doing this for 20 years in emerging markets, and I don’t think the region has ever looked more attractive. This really is picking Tom Brady in the 2000 draft.</p>
<p>They’re unloved, barely anyone owns them, and valuations are at record lows. They’re stronger, the macro’s never looked better, and they’re accelerating as major headwinds start to turn. And perhaps the biggest change is the opportunity set. EMs don’t just benefit from global growth. Increasingly, they make it possible. EMs fuel the world.</p>
<p> </p>
<h3>Risk Factors</h3>
<p>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.</p>
<p>This communication was produced and approved in May 2026 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.</p>
<p>Potential for Profit and Loss <br>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. </p>
<p>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.</p>
<p>All information is sourced from Baillie Gifford & Co and is current unless otherwise stated. </p>
<p>The images used in this communication are for illustrative purposes only.</p>
