Goldman Sachs believes emerging markets are undergoing a momentum reset rather than a fundamental reversal
AI summary card
Goldman Sachs believes emerging markets are undergoing a momentum reset rather than a fundamental reversal
The report judges that the recent EM equity selloff was mainly position-driven, that the Q2 earnings season will be key to repairing sentiment, and that investors should maintain tactical, selective allocations in local rates and frontier high-carry currencies.
- MSCI EM has pulled back about 8% from its June 22 high, but Goldman Sachs believes earnings fundamentals remain intact, and the market may broaden in the second half from AI/technology into more cyclical laggard sectors.
- Consensus expectations indicate MSCI EM Q2 earnings growth of about 64% year over year, with technology contributing nearly three-quarters; excluding tech hardware and commodities, earnings growth is still about 14%.
- The report adds a long NIFTY Banks / short NIFTY Pharma pair trade with a target of 115 and a stop-loss of 90, based on stronger banking fundamentals and reasonable valuations, versus elevated pharma valuations and a mediocre Q2 outlook.
- In local rates, Goldman Sachs prefers selling rates on strength in markets such as PLN, HUF, ILS, and ZAR where inflation has peaked or central banks are dovish, while remaining cautious on markets such as MXN and CLP that are sensitive to the Fed terminal rate.
- In frontier FX, Goldman Sachs maintains a constructive medium-term view on EGP appreciation and continues to favor a high-carry basket long TRY, NGN, and KZT against the U.S. dollar.
Report interpretation
Overview
This is a Goldman Sachs THE EMTRADER emerging markets strategy report titled “A Reset, Nota Reversal.” The report covers three main themes—EM equities, local rates, and frontier FX—and argues that recent market pressure has come more from momentum position unwinds, renewed US-Iran conflict, and rising oil prices than from systemic deterioration in emerging-market earnings or macro fundamentals.
Core views
The core views include: first, EM equities have pulled back after a strong first quarter and first half, but earnings momentum remains strong, and the Q2 reporting season will determine whether sentiment can stabilize; second, the second-half rally may broaden from technology, AI, and North Asia into more cyclical laggard sectors and some oil-importing countries; third, local rates remain constrained by energy prices, Fed expectations, and potential El Nino shocks, requiring selectivity in markets where central banks are dovish or real rates remain high; fourth, although frontier FX is disturbed by short-term geopolitical volatility, high carry can still support total returns for currencies such as TRY, EGP, NGN, and KZT.
Analysis framework
The report combines indicators including equity earnings expectations, EPS revision breadth, market momentum factors, fund flows, valuations, oil price shocks, inflation momentum, real-rate buffers, sensitivity to the Fed terminal rate, FX fair value, and carry-to-vol to form cross-asset trading views.
Methodology notes
Assess whether the rally can broaden from technology and AI to the wider market based on index earnings contribution, EPS revisions, and equal-weight index performance.
The report argues that the first-half rise in MSCI EM was mainly earnings-driven but narrowly concentrated, and that Q2 earnings delivery and profit improvement in non-tech sectors are key to second-half broadening.
Compare whether inflation has peaked across markets, the stance of central banks, the extent of front-end rate retracement, and constraints from real policy rates.
This framework supports looking for opportunities to sell rates on strength in markets such as PLN, HUF, ILS, and ZAR, while avoiding markets that are more sensitive to the Fed terminal rate or not cheap enough on valuation.
Break total FX return into spot moves and carry income, and evaluate whether high carry can offset short-term spot volatility.
The report uses this approach to explain why frontier currencies such as EGP, TRY, NGN, and KZT still have allocation value in volatile environments, with high carry providing a buffer when spot is under pressure.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- MSCI EM equitiesConstructive bias
- Strengths
- Earnings growth and EPS revisions remain strong, and the Q2 reporting season may help stabilize sentiment.
- Weaknesses
- The first-half rally was too narrow, and concentrated positioning in technology and AI has created profit-taking pressure.
- Comparison
- Second-half gains are expected to be lower than in the first half, but market breadth should improve.
- Risks
- Further oil price increases, escalation of geopolitical conflict, volatility in tech stocks, and thinning liquidity.
- NIFTY Banks vs NIFTY PharmaNew long banks, short pharma pair trade
- Strengths
- Banks benefit from credit growth, improving liquidity, and relatively reasonable valuations.
- Weaknesses
- The pharma sector has high valuations and faces greater margin pressure in Q2.
- Comparison
- Banks trade at about 16x valuation versus about 34x for pharma; the pair ratio is near a five-year low.
- Risks
- A sharp rise in oil prices hitting India’s macro outlook, or an unexpected improvement in pharma earnings.
- EM local ratesSelectively sell rates on strength
- Strengths
- Inflation is coming in below expectations in many places, inflation momentum has peaked in CEEMEA and EM Asia, and some central banks are dovish.
- Weaknesses
- Energy supply shocks and El Nino uncertainty limit room for rates to decline.
- Comparison
- Opportunities are clearer in PLN, HUF, ILS, and ZAR; MXN and CLP are more vulnerable or not attractive enough on valuation.
- Risks
- Persistent Fed hike expectations, sticky core long-end yields, and second-round shocks from oil and food prices.
- EGPMaintain a constructive medium-term view
- Strengths
- Deep undervaluation, high real rates, limited reserve erosion, and support from high carry.
- Weaknesses
- Short term is affected by geopolitical risk, oil prices, and foreign positioning in local debt.
- Comparison
- The report maintains its USD/EGP forecast path of 49/48/46 at 3/6/12 months.
- Risks
- Foreign outflows amplifying spot declines, conflict escalation, or further oil price increases.
- TRY, NGN, KZTMaintain selective long exposure to high-carry currencies
- Strengths
- Carry is materially higher than EM high-yield currency peers and can buffer limited or negative spot returns.
- Weaknesses
- TRY still faces the risk of managed depreciation, while KZT has recently been affected by the central bank’s suspension of mandatory FX conversion for exporters.
- Comparison
- NGN and KZT have a more appreciation-skewed risk distribution in a high-oil-price environment.
- Risks
- Deterioration in global risk appetite, reduced policy support, and repricing of the Fed path.
Key data
- Recent MSCI EM pullbackAbout 8% below the 2026-06-22 highAfter gaining more than 20% in the first half, the recent pullback has been concentrated in momentum and AI capex beneficiary sectors.
- EM momentum factorDown nearly 20% over the past 3 weeksReflecting pressure from global momentum trade unwinds.
- Brent oil price changeRose from about $70/bbl to above $85/bbl, an increase of nearly 20%Driven by renewed US-Iran conflict and concerns over Gulf oil flows.
- MSCI EM Q2 earnings expectationAbout 64% year-over-year growthThe technology sector contributes nearly three-quarters, or about 50 percentage points.
- EM earnings growth excluding tech hardware and commoditiesAbout 14%Showing that earnings in non-tech and non-commodity sectors remain healthy.
- MSCI EM 2026 EPS revisionsUp about 3% since June and about 33% year to dateEPS revision breadth has turned positive.
- India banks vs. pharma tradeTarget 115, stop-loss 90, potential upside 15%, downside 10%Long NIFTY Banks, short NIFTY Pharma, denominated in local INR with an initial index level of 100.
- Indian bank valuationAbout 16x consensus forward P/EMore reasonable relative to the broader Indian market.
- Indian pharma valuationAbout 34x consensus forward P/EOutperformed year to date and is at a historical high, while the Q2 earnings outlook is affected by margin pressure.
- USD/EGP forecast49/48/46 at 3/6/12 monthsGoldman Sachs maintains its medium-term appreciation view on EGP.
- short USD/EGP tradeTotal return target raised to 12%, stop-loss adjusted to 5%To accommodate short-term spot volatility while allowing carry to continue accruing.
- El Nino probability97% probability of persisting into early spring 2027If the shock proves persistent, the report estimates an average tightening impact of about 10bp on EM front-end rates.
Impact & implications
In investment terms, the report does not view the recent EM pullback as a trend reversal, but instead emphasizes seeking broader equity opportunities after confirmation from earnings season; within India it prefers banks over pharma; in rates it favors tactically selling some front-end rates that have already retraced; and in FX it maintains selective long exposure to high-carry frontier currencies.
Risks
- Renewed escalation of the US-Iran conflict leading to further increases in oil prices and risk premia.
- Fed hike expectations heating up again, hurting low-carry EM assets that are sensitive to the U.S. terminal rate.
- El Nino triggering a persistent food-price shock and combining with the energy shock.
- Overconcentration in AI- and tech-related positions causing momentum unwinds to keep broadening.
- Overweight foreign positioning in frontier markets may amplify short-term spot volatility in currencies such as EGP.
- If India is hit by a sharp rise in oil prices, both the macro backdrop and equity market may come under pressure.
What to watch
- MSCI EM Q2 earnings season, especially earnings delivery in technology, industrials, and non-tech non-commodity sectors.
- Whether EPS revision breadth remains in positive territory.
- Brent oil prices and developments in Middle East geopolitical conflict.
- Central bank policy signals and front-end rate pricing in markets such as PLN, HUF, ILS, and ZAR.
- U.S. inflation and changes in Fed terminal rate expectations, especially their impact on MXN and CLP.
- Foreign inflows and outflows in EGP local debt, and whether USD/EGP continues converging toward the 49/48/46 path.
- Changes in spot and carry contributions from the TRY, NGN, and KZT high-carry basket.