Emerging markets were strong but narrow in the first half, with tech sell-off and North Asia foreign outflows amplifying short-term volatility

Overview

This report is Goldman Sachs’ EM Weekly Kickstart and 1H26 performance review. It points out that emerging market equities rose significantly in the first half, but the market structure was narrow, mainly concentrated in AI- and technology-related North Asian markets and the technology hardware sector. In the latest week, affected by a global tech sell-off, MSCI EM fell 4%, with South Korea, Taiwan, China, and China lagging. On valuation, MXEF is trading at 12.1x forward P/E, slightly below its 10-year average; on earnings, 2026E EPS was revised up 0.5% in a single week, and forward EPS upgrades since the start of the year have been the core source of index returns.

Core views

The core views include: first, 1H26 emerging market returns were mainly earnings-driven rather than driven by valuation expansion; second, North Asia tech- and AI-related markets remain a medium-term allocation focus, but crowding, foreign selling, and retail leverage are increasing short-term volatility; third, domestic and retail funds are supporting markets such as South Korea, Taiwan, China, and India, but foreign investors remain heavy net sellers on a cumulative basis in 2026; fourth, Goldman Sachs recommends diversifying concentration risk in tech through overweight markets such as Taiwan, South Korea, Brazil, South Africa, Greece, and Hungary; fifth, Brazil, due to its sensitivity to falling rates and the election cycle, is an idiosyncratic allocation combining opportunity and volatility.

Analysis framework

The report combines index performance, earnings revisions, valuation, fund flows, market breadth, volatility, style factors, and 12-month total return forecasts to conduct a top-down emerging market allocation analysis. The market allocation framework adds local index return, FX return, and dividend yield to form a USD total return forecast, while also using EPS growth, valuation, fund flows, and macro events to determine overweight, market weight, or underweight.

Methodology notes

• Index return attributionEarnings and valuation decomposition

  Break down MSCI EM returns into EPS upgrades, valuation changes, and price performance.

  The report believes forward EPS has risen 40% year to date, exceeding the index price gain, causing P/E to fall from 13.5x at the start of the year to around 12x, indicating this rally has been driven mainly by earnings rather than valuation expansion.

• Fund flows and positioningForeign flow and GEM fund flow monitoring

  Track net foreign buying/selling, active and passive fund flows, and the global fund underweight position in EM.

  The report emphasizes that cumulative net foreign selling in 2026 is about US$135bn, with net outflows of US$23bn in the latest week, but global mutual funds remain significantly underweight EM, and future position rebuilding could become potential support.

• Market allocation12-month USD total return framework

  USD total return consists of local index return, FX return, and dividend yield.

  The report uses GS 12-month index targets, GS 12-month FX forecasts and average 12-month forward pricing, along with dividend yield, to estimate USD total returns for each market.

• Style and breadthMomentum, market breadth, and volatility monitoring

  Observe momentum factors, component stocks’ distance from 52-week highs, the share of stocks above their 200-day moving average, EEM implied volatility, and put-call skew.

  The report notes that the EM momentum factor has risen more than 70% year to date, market breadth remains below historical levels, and short-term option implied volatility has risen significantly in EM.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• MSCI EM / MXEF

  Core coverage index

  Strengths

  Strong earnings upgrades, with forward EPS up 40% year to date; valuation at about 12.1x forward P/E, below the level at the start of the year and slightly below the 10-year average.

  Weaknesses

  Performance is concentrated in technology- and AI-related markets, market breadth is narrow, and foreign investors remain heavy net sellers.

  Comparison

  MSCI EM rose about 23% in the first half, significantly outperforming the U.S. and developed markets ex-U.S.; the 12-month target is 2,000 with a forecast USD total return of 16%.

  Risks

  A continued correction in global tech stocks, ongoing foreign outflows, rising EM volatility, and weakening earnings revisions.

• Taiwan equities

  Overweight

  Strengths

  Strong exposure to AI and technology hardware, high forecast CY2026 EPS growth, and a 12-month forecast USD total return of 14%.

  Weaknesses

  High tech concentration, weekly foreign outflows of US$11.3bn, and vulnerability to global tech stock sell-offs.

  Comparison

  Taiwan accounts for about 27.2% of MSCI EM weight in the table, with a 12-month TWSE target of 51,000.

  Risks

  Crowded AI trades, foreign rebalancing outflows, retail leverage, and rising short-term volatility.

• South Korea equities

  Overweight

  Strengths

  Most prominent earnings upgrades, with forecast CY2026 EPS growth reaching 320% in the table, a 12-month KOSPI target of 12,000, and a forecast USD total return of 39%.

  Weaknesses

  Down 6% in the week, with foreign outflows of US$10.4bn, while technical dealer rebalancing flows are pressuring the market.

  Comparison

  South Korea’s USD performance year to date is significantly ahead of EM overall, but its short-term pullback is also larger.

  Risks

  A reversal in the semiconductor cycle, continued foreign selling, and amplified volatility from retail leverage.

• Brazil equities

  Overweight

  Strengths

  Highly sensitive to declines in local rates, and historically equities have performed well during easing cycles; forecast 12-month USD total return of 30%.

  Weaknesses

  The election cycle may bring volatility, and changes in commodities and oil prices may also affect market sentiment.

  Comparison

  The table shows a 12-month IBOV target of 215,000, with forecast local index return of 25%, FX return of 4%, and dividend yield of 6%.

  Risks

  Less-than-expected rate declines, election uncertainty, and a reversal in foreign inflows.

• China equities

  Market weight and downgraded

  Strengths

  The table shows a 12-month MXCN target of 85 and a forecast USD total return of 20%.

  Weaknesses

  Down 6% in the latest week and lagging in USD performance year to date; the report notes that China, along with ASEAN and India, has been dragged by earnings downgrades.

  Comparison

  Compared with the earnings upgrades in South Korea and Taiwan, China is weaker in both performance and earnings momentum within EM.

  Risks

  Further declines in earnings revisions, weakness in consumer-sensitive sectors, and spillover from external tech risks.

• India equities

  Market weight

  Strengths

  The table shows a 12-month NIFTY target of 26,500 and a forecast local index return of 10%.

  Weaknesses

  The report notes that India, like ASEAN and China, has been dragged by earnings downgrades and faces foreign outflow pressure.

  Comparison

  The table shows a forecast 12-month USD total return for India of 9%, below MSCI EM overall at 16%.

  Risks

  Earnings downgrades, foreign outflows, and changes in valuation and macro expectations.

• EM technology hardware and semiconductors

  Sector overweight

  Strengths

  The table shows forecast CY2026 EPS growth of 196% and YTD USD return of 109%, making it the core source of EM’s strong performance.

  Weaknesses

  High concentration, crowded positioning, and high sensitivity to global tech risk appetite.

  Comparison

  The sector’s NTM P/E is about 12.6x, close to MSCI EM overall at 12.1x, but growth and returns are significantly stronger.

  Risks

  A continued global tech sell-off, downward revisions to AI earnings expectations, and momentum reversal.

Key data

• MSCI EM weekly performance-4% w/wAgainst the backdrop of a global tech sell-off, North Asian markets with heavier tech and AI weights underperformed.
• MSCI EM first-half performance+23% 1H26Significantly outperformed the roughly +6% to +8% year-to-date performance of the U.S. and developed markets ex-U.S.
• MXEF valuation12.1x forward P/EAbout 0.2 standard deviations below the 10-year average.
• EM 2026E EPS revision+0.5% w/wForward EPS has risen 40% year to date, making it the main driver of index returns.
• Weekly foreign outflowUS$23bnMainly driven by outflows of US$11.3bn from Taiwan, China and US$10.4bn from South Korea.
• Cumulative foreign outflow in 2026about US$135bnSouth Korea, Taiwan, China, and India saw the most notable outflows, but domestic and retail funds are still providing support.
• Momentum factor performancemore than +70% ytdThe best rolling 6-month performance since the global financial crisis.
• MSCI EM 12-month target2,000Corresponds to a forecast 12-month USD total return of 16%, including local index return, FX return, and dividend yield.
• Overweight marketsTaiwan, South Korea, Brazil, South Africa, Greece, HungaryGoldman Sachs emphasizes diversified allocation while maintaining a preference for tech-heavy markets and some idiosyncratic markets.
• Sector overweight directionsTechnology hardware and semiconductors, internet/media entertainment, metals and mining, energySector allocation is tilted toward cyclicals, with underweight positions in downstream and consumer-sensitive sectors.

Impact & implications

The investment implication is that emerging markets remain supported in the medium term by earnings upgrades, reasonable valuations, and global fund underweight positioning, but short-term pullback risks come from tech concentration, foreign selling, retail leverage, and rising volatility. At the portfolio level, investors should not chase only North Asia tech beta, but should diversify with idiosyncratic or rate-sensitive markets such as Brazil, South Africa, Greece, and Hungary. At the sector level, Goldman Sachs prefers technology hardware, internet, and commodity-related sectors, while remaining more cautious on consumer-sensitive and some downstream sectors.

Risks

• Global technology and AI-related stocks continue to correct, dragging down North Asia and EM indices.
• Foreign outflows continue, especially funding pressure in South Korea, Taiwan, China, and India.
• Market breadth is narrow, with index gains overly dependent on a small number of tech-heavy markets and sectors.
• Rising retail leverage activity in North Asia may amplify volatility and drawdowns.
• Geopolitical events and changes in oil prices affect earnings sentiment, commodity markets, and Latin American market performance.
• Uncertainty around Brazil’s election cycle and rate path may lead to volatility in valuations and fund flows.

What to watch

• Whether foreign outflows from South Korea and Taiwan, China begin to ease.
• Whether EM 2026/2027 EPS revisions can continue to be driven by South Korea and North Asia.
• Whether earnings downgrades in China, India, and ASEAN are bottoming out.
• Whether EEM 1-month implied volatility and put-call skew continue to rise.
• MSCI EM market breadth, the share of stocks above the 200-day moving average, and equal-weight index performance.
• Brazil’s pace of rate declines, pre-election volatility, and foreign inflows.
• Whether global mutual funds begin to repair their underweight position in EM.