Interview
Why emerging markets could keep rallying
- Goldman Sachs raised its price target for MSCI Emerging Markets (EM) equities, projecting a 10% upside rally through the end of the year.
- The recent 1.5-month EM equity rally is attributed to three key ingredients: positive growth differentials vs. global equities, a weaker US dollar, and flat-to-up S&P 500 performance.
- Institutional positioning remains underweight for EM equities, particularly within the mutual fund sector, creating potential for further inflows.
- Hedge funds and "fast money" participants have not yet engaged in significant buying, with observed upside call buying largely driven by non-EM-focused "tourist" funds.
- Analysts prefer "EM ex-China" over China for the remainder of the year due to higher confidence in dollar-denominated, risk-sentiment trades versus China-specific variables.
- Chinese equity performance is currently dependent on global trade policy, US-China tariff negotiations, and potential domestic stimulus measures.
- China's relative outperformance following the "deep seek" news has cooled, with the sector recently underperforming both the broader EM index and US equities.
- Brazil is identified as a high-conviction opportunity, with the central bank nearing the end of its hiking cycle and expected rate cuts within the next year.
- Brazilian equity valuations are deemed attractive ahead of next year's election, which could introduce a market-friendly candidate.
- No institutional investors currently hold significant exposure to Brazilian equities, suggesting limited positioning risk.
- Implied volatility in Brazil has compressed to near all-time lows, historically deviating from the typical premium over US volatility.
- Goldman Sachs recommends owning upside calls on dollar-denominated Brazilian indices to capture both equity upside and potential foreign exchange benefits.
- A structural shift toward EM outperformance over US equities is viewed as a multi-year trade contingent on institutional reallocation from underweight positions.
- Analysts anticipate positive earnings and growth differentials will allow EM to fundamentally outpace the US over the coming years, challenging the "US exceptionalism" narrative.
- Key near-term catalysts to monitor include the upcoming election in South Korea and volatility trends in the US bond market.
- Sustained equity outperformance is viewed as contingent on US bond market stability; persistent bond market jitters could hinder risk asset rallies.