'Emerging markets no longer on the periphery of progress'
This transformation is perhaps best captured by businesses like Kaspi.kz, a 'super-app' used by the majority of the adult Kazak population for everything from banking and bill payments, to shopping and ride-hailing. It has fundamentally reshaped the country's economy. Or take Luckin Coffee in China, which now has many more outlets than Starbucks and continues to grow rapidly into an underpenetrated market. These aren't speculative moonshots. They are scaling in key domestic markets with improving profitability and thus operational resilience.
Two key headwinds - the strong US dollar and negative sentiment towards China - have been turning. An increasing amount of EM-to-EM trade is being done in non-dollar currencies. The weak dollar is not only supportive of EM financial conditions but also creates favourable sentiment at a time when there are plenty of reasons to ask questions of the traditional safe-haven countries of the world. With over $22 trillion held by non-US investors in American assets - much of it unhedged - even a small shift in allocation could drive renewed EM demand.
Meanwhile, China's trajectory is not solely about geopolitics or trade policy, as some doomsayers posit. In fact, this may be the wrong focus completely. It's about a massive, increasingly self-sufficient domestic economy. Retail sales in China are over ten times greater than its exports to the US - a fact that should redirect our focus from tariffs to the consumer. Companies like Meituan and DeepSeek are testament to China's technological resilience. And for what it's worth, over 70% of the world now trades more with China than with the US. On top of this, Chinese consumer spending is visibly starting to recover.
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We often talk about EM as if it were a single monolith. It is not. What binds these regions is clearly not geography or even income level. But the quality of opportunity and scale of ambition across such a vast set of countries is trending upwards and worth shouting about.
There are many more world class EM companies than before, in a range of industries: in semiconductors, gaming, fintech, and green energy, to name a few. For example, CATL in electric vehicle batteries, SK Hynix in High Bandwith Memory (memory chips used for high-performance computing and AI), and Tencent and SEA in gaming. The best companies earn their place in portfolios through world-class execution, deep competitive moats, high returns on capital, and often, scarcity of competition. EM's best companies are, in many cases, the only game in town for investors seeking exposure to essential themes like electrification, digital transformation, and resource resilience.
Perhaps the most dangerous risk for investors today is underexposure to this transformation. Valuations remain modest. Domestic markets are deepening. Currency, debt, and governance risks - while still present - are far better managed than in previous cycles. And most importantly, these companies are not all reliant on a rebound in global trade or commodity prices. Many are thriving in local ecosystems, with local customers, on local capital.
This is not to say the path ahead is smooth. Politics is messy (though isn't that true in developed markets too?). Markets are often volatile. But the direction of travel is clear. Emerging markets are no longer on the periphery of progress - they are increasingly the protagonists. To ignore them is not caution, it's more likely negligence.
Andrew Keiller is a partner at Baillie Gifford
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