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Baillie Gifford Smiles On Emerging Markets

Amanda Cheesley

26 May 2023

At a media roundtable in Edinburgh last week, experts at were optimistic about investment opportunities in emerging markets over the next decade.

“Returns from emerging markets over the last decade haven’t been where investors might have expected them to be. Returns from the MSCI EM Index, for example, have been 4 per cent a year in sterling terms which is not good enough, given the risk in emerging markets,” Andrew Keiller, of Baillie Gifford's client team in emerging markets, said.

He explained why the next decade might be better than the last and why now might be a good time to invest in emerging markets. 

“The macro backdrop is very positive, compared to the developed world. Government budgets in emerging markets are good and growth projections for emerging markets by the International Monetary Fund are also positive,” Keiller said. India, for instance, has one of the fastest growing economies. “There are also attractive valuations. Companies that delivered strong growth are available at undemanding valuations,” he said.

“There is also a huge drive for self-enhancement in places like India and China. India, for instance, built a huge 4G mobile network since 2016, with over 400 million users, with new businesses created as a result,” he continued. “It’s also clear that emerging markets will play an important role in the green transition as they have large deposits of copper and nickel which will be needed in the green transition. Emerging market firms will benefit from that,” he said. 

Andrew Stobart, portfolio manager of Baillie Gifford’s Emerging Markets Growth Fund, was also positive about the companies there. “We are overweight in India in this portfolio. We held Delhivery since 2023, a technology-led logistics company which has outcompeted other firms, with very entrepreneurial management and great potential,” he said.

“We have 20 per cent of our fund in Latin America. We have held Mercado Libre since 2010, which is an ecommerce business in Latin America that has grown rapidly in the last decade,” he added.  “We also have an overweight position in semiconductors, and have owned a position in Taiwan Semiconductor Manufacturing Company (TSMC) since 2004,” he said. 

Emerging and frontier markets have faced headwinds in recent months. The MSCI Emerging Markets Index of equities has chalked up total returns (capital growth with reinvested dividends) of 3.59 per cent; the MSCI Emerging Frontier Index has delivered returns of 3.58 per cent. By comparison, the MSCI World Index of developed countries' equities (in US dollars) has delivered returns since early January 2023 of 10.22 per cent. A factor weighing on developed/emerging markets has been rising US interest rates, increasing debt repayment costs in a number of developing countries.

Baillie Gifford Emerging Markets Growth Fund
The fund aims to outperform (after deduction of costs) the MSCI Emerging Markets Index, as stated in sterling, by at least 2 per cent per annum over rolling five-year periods. 

It invests in a portfolio of emerging market stocks, on a long-term five-year perspective, with a strong preference for growing companies. Many market participants favour the safety of steady predictable growth but the team is willing to invest in companies where the outcomes are less certain, but where the potential returns are significant. The portfolio will typically hold between 60 to 100 stocks and has outperformed the MSCI EM index over the past five years.

Over 30 per cent of the fund is invested in China, followed by South Korea, India, Brazil, Taiwan, Mexico and Indonesia. Top 10 holdings include household names like TSMC, Samsung Electronics, Chinese technology and entertainment multinational Tencent as well as Mercado Libre and e-commerce giant Alibaba. 

Sustainable Growth Fund
The Sustainable Growth Fund, which was relaunched last July and managed by Toby Ross and Katherine Davidson, invests in companies which are sustainable in both senses of the word, delivering enduring growth and enduring good. For growth to endure, companies must be resilient to a range of economic and political environments, and capable of achieving a decade or more of profitable growth, Davidson said at the roundtable. 

To deliver enduring good, they must make a positive difference to society, either through impactful products and services, or through influential business practices that inspire wider change, she added. Citing an example at the roundtable, she said that the fund invests in Starbucks due to the work they do in helping to support coffee farmers in Latin America. In view of the volatile nature of coffee prices, Starbucks set up a fund to help ensure price stability for coffee farmers, she added. 

The fund, which is classified as Article 8 in the EU’s Sustainable Finance Disclosure Regulation, aims to outperform (after deduction of costs) the MSCI ACWI Index, as stated in sterling, by 2 to 3 per cent per annum over rolling five-year periods. The portfolio, which will typically hold between 55 to 80 stocks, has outperformed the MSCI ACWI Index over the past 6 months, but it has underperformed it over the last two years.

Top 10 holdings include US multinational technology company NVIDIA, MercadoLibre, as well as TSMC and L’Oreal. Sectors include industrials, IT, healthcare and consumer staples. Nearly 50 per cent of the fund is invested in North America, followed by Europe (ex UK), developed Asia Pacific, emerging markets and the UK. See here for another article about the firm which manages about £234 billion ($289 billion).