MSCI EM faces near-term pressure, but 1QCY26 earnings upgrades support selective positioning opportunities

Overview

This report is Goldman Sachs' weekly forward-looking strategy note on emerging market portfolios, with a core discussion of recent MSCI EM performance, fund flows, 1QCY26 earnings progress, Brazil rate and election sensitivity, and feedback from local investors in Brazil, South Africa, and India. The report shows that EMs were pressured in the near term by heavy foreign selling and political events, but earnings data were broadly better than expected, and market positioning is shifting from broad beta toward greater emphasis on regional, sector, and thematic differentiation.

Core views

First, near-term market performance was weak: MSCI EM fell 2% for the week, Brazil declined 7% on political headlines, and Korea fell 6% on Friday, erasing most of its weekly gains. Second, earnings were better than expected at the start of the quarter; companies that have reported show C1Q26 EPS growth tracking at about 41%, materially above the roughly 28% consensus expected at the start of the quarter. Third, flows remain the main source of pressure, with weekly foreign selling in EM equities of about US$17.5bn, concentrated in Korea and Taiwan. Fourth, positioning still emphasizes cyclical and core themes, with an overweight on technology hardware, internet, and commodity-related sectors, and a broad underweight on downstream and consumption-sensitive sectors. Fifth, the Brazilian market is highly sensitive to local rates; lower rates usually support higher valuations, but the election cycle may increase volatility.

Analysis framework

The report uses a portfolio strategy framework that combines market performance, valuation, earnings revisions, fund flows, macro data, and feedback from local investors. At the market level, it compares MSCI EM, regional, and country performance; at the earnings level, it tracks 1QCY26 reporting progress, EPS growth, and the sources of upward and downward revisions; at the flow level, it monitors GEM fund flows and foreign inflows/outflows disclosed by exchanges; and at the thematic level, it evaluates cyclicals, quality, technology, internet, commodity exporters, Brazilian domestic rate-sensitive sectors, and selective alpha themes in India.

Methodology notes

• equity_strategyEM weekly portfolio strategy

  Weekly portfolio strategy tracking

  Cross-validates short-term pressure and medium-term allocation opportunities in EM equities using market performance, valuation, earnings revisions, fund flows, and macro events.

• earnings_analysis1QCY26 EPS tracking

  Earnings season tracking

  Compares actual earnings growth with the consensus expected at the start of the quarter, based on the share of MSCI EM market cap and number of companies that have reported.

• valuation_analysisNTM P/E versus local rates

  Rate-sensitive valuation framework

  Measures how sensitive local market valuations are to rate changes by comparing Brazil 10-year yields with Brazil ex-Commodities NTM P/E; the chart shows a negative correlation.

• flow_analysisEM equity fund flows

  Flow pressure identification

  Identifies sources of market pressure through weekly foreign flows and GEM fund flows, with particular focus on concentrated outflows in technology-heavy markets such as Korea and Taiwan.

Asset mapping & comparison

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

• MSCI EM / MXEF

  Core benchmark coverage

  Strengths

  Valuation is at 11.8x NTM P/E, about 0.5 standard deviations below the 10-year average; 1QCY26 earnings tracking is stronger than expected.

  Weaknesses

  Short-term performance is weighed down by heavy foreign outflows, cyclical sector weakness, and regional political events.

  Comparison

  Earnings performance is better than the consensus at the start of the quarter, but flows and macro risk are making price action weaker than the fundamentals.

  Risks

  Continued foreign selling, geopolitical shocks, changes in the rate path, and election volatility.

• Brazil equities

  Key country market and rate-sensitive asset

  Strengths

  A low-rate environment usually supports valuation expansion; oil and gas exporters and domestic bond-proxy sectors remain attractive.

  Weaknesses

  Political headlines drove a 7% weekly decline; investors worry about a reversal in capital flows, a shorter easing cycle, and election volatility.

  Comparison

  Brazilian equities are among the most negatively correlated EM markets to local rates.

  Risks

  Election-cycle volatility, expensive banks, and credit-cycle concerns from household leverage.

• Korea equities

  One of the preferred large EM markets

  Strengths

  North Asia technology made a meaningful contribution to C1Q26 EPS upgrades, and the report still favors Korea among large EM markets.

  Weaknesses

  Korea fell 6% on Friday, and weekly foreign outflows were about US$13.2bn.

  Comparison

  Earnings contributions are strong, but flow pressure is also the most concentrated.

  Risks

  Further foreign selling, a pullback in crowded technology trades, and domestic sector drags on EPS growth.

• South Africa equities

  One of the preferred large EM markets

  Strengths

  Commodity exporters may benefit from the gold rebound.

  Weaknesses

  Domestic economic growth has not yet shown sustained improvement, so a turnaround in local sectors still needs confirmation from growth data.

  Comparison

  Relative to domestic sectors, exporters are more likely to lead any near-term upside.

  Risks

  Insufficient growth recovery, lower commodity prices, and weak domestic demand.

• India equities

  A market recently downgraded to neutral

  Strengths

  Selective alpha opportunities still exist in energy security, data-center equipment, commodity exporters, and small caps.

  Weaknesses

  Faces macro and earnings risks related to the Iran war, as well as continued foreign selling.

  Comparison

  The report emphasizes internal sub-theme selection in India more than a broad market call.

  Risks

  Continued FII outflows, downward EPS revisions, macro uncertainty, and valuation pressure.

• Gold / commodity exporters

  Beneficiary theme

  Strengths

  The gold rebound supports commodity exporters in markets such as South Africa, and the report also has an overweight on commodity-related sectors.

  Weaknesses

  Sensitive to commodity prices and global growth expectations.

  Comparison

  May outperform domestic-demand sectors until economic growth improves more broadly.

  Risks

  A pullback in gold or commodity prices, a stronger dollar, and slower global demand.

Key data

• MSCI EM weekly performance-2% w/wDragged by Brazil's 7% decline and cyclical sectors.
• Brazil weekly performance-7%Mainly driven by political headlines.
• Korea Friday performance-6%Friday selling erased most of the weekly gain, but the week still ended up about 1%.
• MXEF NTM P/E11.8xAbout 0.5 standard deviations below the 10-year average.
• EM 2026E EPS weekly revision+1%Upward revision in EM 2026E EPS over the past week.
• 1QCY26 EPS tracking growth41% yoyAbove the roughly 28% yoy consensus at the start of the quarter.
• MSCI EM reporting coverageabout 75% of companies, about 80% of market capUsed for 1QCY26 earnings-season tracking.
• EM equity weekly foreign flow-US$17.5bnConcentrated outflows from Korea and Taiwan.
• Korea foreign flow-US$13.2bnLarge selling in a technology-heavy market.
• Taiwan foreign flow-US$2.5bnAlso under pressure from fund outflows.
• Thailand foreign flow+US$0.3bnOne of the few markets with inflows in the report.
• Brazil rate and valuation relationshipR² = 0.43The chart shows a negative correlation between Brazil ex-Commodities NTM P/E and the Brazil 10Y rate.

Impact & implications

The investment implication is that short-term EM beta is being restrained by foreign outflows, geopolitical risk, and election risk, but earnings upgrades and regional differentiation create room for active allocation. At the portfolio level, investors should avoid simply chasing the headline index and instead pivot toward North Asia technology and industrials with stronger earnings resilience, exporters benefiting from higher gold and commodity prices, and Brazilian domestic sectors that benefit from easing rates or lower yields. At the same time, amid continued foreign selling and downward EPS revisions, India is better approached through selective alpha themes such as energy security, data-center equipment, commodity exporters, and small caps.

Risks

• Continued foreign outflows from EM equities, especially in technology-heavy markets such as Korea and Taiwan.
• Brazil political headlines and the election cycle could amplify market volatility.
• Brazil's easing cycle may be shorter than expected, weakening valuation support for local rate-sensitive sectors.
• Macroeconomic shocks related to the Iran war could affect earnings and flows in markets such as India.
• Input-cost pressures may leave sales resilient but compress margins, so the quality of earnings beats still needs to be validated.
• China and Korea Domestic remain the main drags on C1Q26 EPS growth.
• Banks face concerns over high valuations and a credit cycle shaped by elevated household leverage.

What to watch

• Whether subsequent foreign outflows from MSCI EM broaden beyond Korea and Taiwan to more markets.
• Whether the remaining 1QCY26 reporters can keep EPS growth at around 41%.
• Whether earnings upgrades in North Asia technology, industrials, Greek banks, and Brazil energy continue.
• The path of Brazil 10-year yields and the impact on Brazil ex-Commodities valuations.
• Whether volatility rises 5 to 6 months ahead of the Brazil election, and whether historical election-cycle market dispersion repeats.
• Whether South Africa shows sustained economic improvement that can lift domestic sectors.
• Whether India's FII outflows and 12-month EPS revision index continue to deteriorate.
• Whether gold and commodity prices can continue to support the exporter theme.