Emerging Markets: investor letter Q2 2025

As with any investment, your capital is at risk.

“I don’t know whether war is an interlude during peace, or peace an interlude during war.”

Georges Clemenceau (French Prime Minister, 1906-09, 1917-20)

Clearly stockmarkets around the world are being held in thrall by events in the Middle East. As we write it is still very uncertain whether the conflict escalates, deescalates or returns to an uneasy status quo. Currently FX, bond and commodity markets are suggesting that the ‘12 Day War’ is over; this might prove too sanguine. What should we make of this from an investment perspective? We have to admit that we can’t know what the eventual outcome will be, but it shouldn't be beyond us to think through some of the major moving parts as they pertain to Emerging Markets.

Most directly, we’d note that our clients’ Emerging Markets portfolio has little to no Middle Eastern exposure. This hasn’t been an asset allocation decision, rather a function of the shortage of compelling bottom-up investment opportunities. More broadly, further uncertainty in geopolitics isn’t likely to be good for the global growth outlook. At a portfolio level, it means that this is one of those periods when diversification matters. At a company level, it means that it is one of those periods when resilience matters. Generally, the portfolio is positioned in companies that are larger, more profitable and more cashflow generative than the average and therefore with a greater capacity to withstand shocks.

The impact on energy markets is a key consideration here. Our portfolios are positioned with an overweight to the energy sector. On the supply side, we see oil exploration is at the lowest level on record (reliable records going back to the 1950s, at least), but we have also been explicit with clients in saying that an overweight is also a hedge to the risk of oil price upside, in the event of supply disruptions. The Strait of Hormuz in the Middle East sees c.21m barrels pass daily (the context is daily oil demand is c.100 million barrels per day) and Iran is debating whether to 'close' this in retaliation.

That said, most of the oil that flows through the Strait goes to Asia/China and it’s unlikely Iran will want to antagonise China: 90 per cent of its oil exports go there, and it needs the oil revenues. China receives about 13 per cent of its oil imports from Iran. Despite the narratives circling about the 'Sinosphere', it would be surprising to many if China tied itself too closely to Iran. While it is the largest oil importer in the world in absolute terms, China’s reliance on oil as part of its overall energy mix is amongst the lowest of the major economies, following its success in nuclear, solar, wind and electric vehicles. Moreover, while China’s strategic reserves are unknown, they are likely to be of a similar quantum as the US (~400m barrels) and the EU (~800m barrels).

Elsewhere in Asia, India and Indonesia have historically appeared the most vulnerable to external shocks, such as the 2014/15 ‘taper tantrum’. However, perhaps as a consequence, both are now running smaller current account deficits and have beefed up their FX reserves. In this regard, the smaller economies of Thailand and the Philippines could prove more vulnerable to a prolonged oil price shock. The exposure in our clients’ portfolios is minimal to non-existent. From an opportunity perspective sustained higher oil prices will probably accelerate the energy transition, driving demand for core minerals (copper, lithium), products and components, much of which are produced in Emerging Market countries.

Aside from the risks in Emerging Markets, the team have been busy looking for the rewards. Last month four of the team went to China where there continues to be a juxtaposition between a dynamic and innovative private sector and central and local governments who often have their own priorities. While competition remains fierce, this also meant some established businesses preferred to keep a low profile in terms of their profitability. China’s technological edge was clearly on display at meetings with Luckin Coffee and their effective use of data to gain insight into customer preferences, and a test drive of Xiaomi’s SU7 which offers Porsche like performance for US$ 30–40,000.

Three of the team were in Korea recently where there is some excitement about the impact of the ‘Value Up’ programme for local companies. It is very rare that an elected leader sets a target for a stock market index! However, while any improvement in governance is to be welcomed (for the first time independent directors have a fiduciary duty) the truth is that the programme will probably have the biggest impact on the poorest quality companies. On the one hand we always want to make good returns for our clients, on the other hand as long-term growth investors these companies aren’t generally in our investment bailiwick. Nonetheless we will monitor the market and invest where we can do so honourably within the context of our investment philosophy.

Lastly, honourable mention should be made of the solitary team member who has been in Indonesia (though apparently not Bali!). This is a young, populous country (195 million people) with considerable natural resources: Indonesia accounts for 60 per cent of global refined nickel supply, 50 per cent of global crude palm oil exports, and is the world’s third largest coal producer (9 per cent market share). Yet despite these considerable advantages, Indonesia remains a comparatively poor investment universe for growth investors as commodity dependence, state-owned enterprise dominance and a weak manufacturing sector provide little grist to the mill from a Baillie Gifford perspective. However, we will continue to monitor development in the country closely and some stock picking opportunities may yet emerge.

The common arguments for the asset class are that it’s cheap and a good diversifier. However, we should also make it clear that this is also absolutely about the companies, hence the team’s time on the ground. Emerging Markets companies are world class in batteries, semiconductors, mining, fintech, gaming, ecommerce, and social networks. In many cases, Emerging Market companies are providing critical inputs that the modern world needs: from metals to semiconductors, the common thread here is there are very few alternatives elsewhere. 

It therefore stands that the Emerging Markets are home to a disproportionate number of great growth companies. Crucially this is starting to be recognised in stock market returns where the MSCI Emerging Markets index is outperforming the World and US indices year-to-date.

Performance

As ever, we would caution reading too much into short term performance, which tends to be driven by news flow. In contrast we are looking to invest in the best companies that are often exposed to multi-year structural trends. These companies’ valuations can obviously be impacted by short term events, but the evidence is clear that, in the long-term, share prices follow hard currency earnings growth.

MercadoLibre’s share price (also the top contributor last quarter) has demonstrated notable strength over the past quarter, driven by a combination of robust financial performance, operational execution, and favourable market dynamics in Latin America. The company reported strong financial results, with first quarter 2025 revenues growing 37 per cent year-on-year (YoY) to $5.6bn and net income up 44 per cent YoY. This was driven by 43 per cent YoY fintech revenue growth and 32 per cent commerce revenue growth. Unique buyers on the platform increased 25 per cent to nearly 67 million, the highest new buyer growth since early 2021, and fintech monthly active users rose 31% to 64 million. Argentina saw exceptional momentum: Gross Merchandise Value (GMV) grew 126% YoY, with 52 per cent growth in items sold.

MercadoLibre has improved logistics efficiency, reducing fulfilment costs per order in key markets like Brazil, Mexico, and Chile, which has supported profitability and allowed continued investment in initiatives such as free shipping. Strategic investments in shipping (eg lowering free shipping thresholds to 19 reais from 79 reais) and logistics infrastructure have enhanced user experience, driving more than 30 per cent GMV growth in key markets like Brazil and Mexico. The company’s ability to cross-sell fintech products (eg loans to Mercado Pago users) and expand fulfilment penetration (eg 60 per cent in Brazil) has reinforced its competitive position. 

While short-term risks like margin pressures from aggressive pricing and logistics investments exist, the long-term outlook remains positive as the company leverages its ecosystem to sustain growth. Stabilisation in Argentina and resilient consumer demand across Latin America have contributed to outsized growth, particularly in markets where MercadoLibre holds a strong competitive position. The ongoing shift from physical to digital commerce, and payments continues to provide a secular growth tailwind. A change of leadership has seemingly had little impact – CEO Macros Galperin will transition roles to Executive Chairman on 1 January 2026, with Ariel Szarfsztejn (most recently Commerce President) named as the upcoming CEO and President.

TSMC once again reported an upbeat first quarter results with gross margin (GM) at 58.8 per cent and net profit of NT$361.6bn (up 60 per cent YoY). Despite rising macro and tariff uncertainties, TSMC is not seeing customers’ orders change at the moment, and the company has kept its 2025 sales guidance of mid-20 per cent YoY and US$38-42bn capital expenditure unchanged (May’s revenue jumped 40 per cent YoY). TSMC also maintained its AI revenue CAGR of mid-40 per cent in the long term.

Structural growth drivers include TSMC’s near-monopoly in AI accelerators and edge AI, supported by its advanced process roadmap and leadership in packaging technology. AI demand from hyperscalers and High-Performance Computer applications remain a critical tailwind. Price hikes on leading-edge process nodes in USD terms have alleviated concerns about GM pressures from TWD appreciation and overseas expansion costs. This pricing strategy is expected to further strengthen in 2026.

Also, concerns about an Intel joint venture (JV) or technology transfer were alleviated by TSMC’s $100bn US investment commitment and clear communication during earnings calls. This renewed optimism about TSMC’s market position and growth in the US. The company's CEO makes it very clear that “TSMC is not engaged in any discussion with other companies regarding joint venture, technology licensing or technology transfer and sharing”.

Petrobras. It feels tricky writing about the oil price in a quarter in which we’ve seen the biggest one day moves (both up and down) over the last three years. One minute we’re talking of a US recession and a potential global slowdown, which led Brent crude to its lowest price in four years and put pressure on Petrobras’ revenues and profits, the next a Middle east conflagration with associated jumps in oil prices. The company reported first quarter numbers that missed both revenue and profit estimates. Revenues fell 11 per cent YoY, and margins were squeezed by an increase in pre-salt lifting costs and weaker refining markets. Net debt rose to U$56bn in Q1 from U$52bn at the end of 2024.

Petrobras further reduced gasoline prices by 5.6 per cent in June, aligning with the global trend of lower oil prices, but putting pressure on its revenues. The company has signalled a more cautious approach to dividend payouts, prioritising investment and financial stability, which likely disappointed yield-focused investors. Nevertheless, Petrobras remains a major deepwater producer with long-term potential, while crucially its assets lie far away from any disruptions in the Middle East.

SQM’s share price hit 52-week lows during the quarter. Its share price weakness is primarily the result of a steep and sustained drop in lithium prices due to global oversupply, compounded by earnings misses, analyst downgrades, and broader market scepticism about the lithium sector’s near-term prospects.

For the first quarter 2025, despite record lithium sales volumes, lower prices and higher production costs have squeezed gross profit (29.4% of revenues in 1Q25 vs. 34.0% in 1Q24). Net profit was $137.5m, well below analyst forecasts of $171.2m. SQM highlighted that lithium prices have fallen in recent weeks due to ongoing market oversupply, with expectations of lower realized prices in 2Q25. This trend contrasts with stability in early 2025 and pressures profitability at a time that SQM remains committed to aggressive lithium. Although other business lines like iodine and specialty plant nutrients have performed well, they have not been sufficient to offset the impact of lower lithium prices. 

Our holding reflects a longer-term view of demand-supply, in which SQM’s outlook is underpinned by its structural dominance in lithium and iodine, strategic expansion into key growth markets and a resilient financial profile.

While we must remain aware of the risks and build suitably diversified and resilient portfolios, our focus from a bottom-up perspective remains finding great long-term growth companies. At present we are finding no shortage of these and there remains strong competition for capital within the portfolio. We remain optimistic about the Emerging Market asset class and with appropriate diversification, the portfolio is positioned accordingly.

Emerging Markets

Annual past performance to 30 June each year (%)

Annualised returns to 30 June 2025 (%)

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.

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