Earnings upgrades and returning foreign flows support emerging markets, but pre-election volatility risk in Brazil is rising
AI summary card
Earnings upgrades and returning foreign flows support emerging markets, but pre-election volatility risk in Brazil is rising
MSCI EM rose 2.7% for the week, led by South Korea and Taiwan; second-quarter earnings were materially better than expected at the start of the season, valuations remain attractive, and Brazil has become the key focus for both risk and opportunity because of interest-rate sensitivity and election factors.
- MSCI EM rose 2.7% for the week, with South Korea up 13% and Taiwan up 3%, while Brazil, South Africa, and China lagged.
- More than 550 companies, representing about 75% of MSCI EM market capitalization, have reported, with median second-quarter year-over-year earnings growth tracking at 17%, above 11% at the start of the season.
- Companies beating earnings expectations accounted for 46%, versus 33% missing expectations; sales beats accounted for 44%, versus 15% missing expectations.
- EM 2026 EPS has been upgraded by approximately 7% cumulatively since June, driven mainly by North Asia, parts of Central and Eastern Europe and Latin America, and sectors such as technology hardware and energy.
- Foreign investors recorded net inflows of US$8.4bn into emerging-market equities for the week, led by Taiwan, South Korea, and India.
- MSCI Brazil has corrected by about 8% in August and approximately 18% from its mid-April year-to-date high; the approaching election could lift currently subdued implied volatility.
Report interpretation
Overview
The report argues that emerging markets have recently strengthened on the back of a North Asian technology rebound, while fundamental support remains solid: second-quarter earnings growth, earnings surprises, and full-year EPS expectations have all improved from the start of the reporting season. On valuation, MXEF trades at a forward P/E of 10.1x, around two standard deviations below its ten-year average, providing some valuation cushion. Fund flows have also improved, with foreign investors turning to net inflows after seven consecutive weeks of outflows. Meanwhile, Brazilian equities have materially underperformed, with their weakness exceeding the interest-rate effects indicated by the model, and the election cycle set to become the key near-term variable.
Core views
Emerging-market gains have been driven mainly by markets with high AI and technology exposure, such as South Korea and Taiwan, and market performance remains concentrated.Second-quarter earnings have been strong, with earnings expectations in North Asia, Central and Eastern Europe, the Middle East, and parts of Latin America revised upward from the start of the reporting season.Second-quarter EPS tracking improved notably in technology, industrials, energy, and financials; earnings beats were particularly prominent in energy, health care, and technology.MSCI EM valuations are low relative to history and continue to trade at a discount to the United States and other major developed markets.Brazilian equities are highly sensitive to local interest rates. When rates decline, rate-sensitive and domestic-demand-related sectors have historically tended to outperform, but current election uncertainty could amplify volatility.
Analysis framework
The report assesses weekly price performance of MSCI EM and national markets, foreign and fund flows, earnings-season tracking, EPS revisions, valuations relative to historical percentiles, market breadth, implied volatility, and historical comparisons of Brazil's interest rates and election cycles.
Methodology notes
Measures earnings trends through reported-company coverage, year-over-year earnings growth, earnings surprises, and full-year EPS revisions.
By comparing second-quarter EPS expectations at the start of the reporting season with current expectations, and examining the proportions of companies beating and missing estimates, the analysis assesses whether earnings momentum is improving.
Compares the current forward P/E with the ten-year average and standard deviation.
MXEF's forward P/E is 10.1x, approximately two standard deviations below its ten-year average, indicating relatively low valuation versus history.
Analyzes the historical relationship between Brazilian equities and changes in local interest rates.
The report notes that rising rates weigh on equity performance, but Bovespa's recent underperformance exceeds the range explained by the model; historically, rate-sensitive and domestic-demand sectors have generally been relatively stronger during periods of declining five-year rates.
Compares equity returns, valuations, fund flows, and implied volatility before and after past elections.
Market outcomes across prior election cycles were highly dispersed: markets rose after the 2006 and 2018 elections but corrected in 2014 and 2022, so no single directional conclusion can be inferred.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- MSCI EM / MXEFCore emerging-market equity benchmark
- Strengths
- Improving earnings trend, continued 2026 EPS upgrades, valuations low relative to history, and recovering foreign inflows.
- Weaknesses
- Market breadth is narrow, and the rebound remains concentrated in AI- and technology-related markets.
- Comparison
- Maintains a valuation discount versus the United States and other major developed markets; valuations are low relative to its own ten-year history.
- Risks
- A decline in global risk appetite, volatile fund flows, high market concentration, and geopolitical shocks.
- South KoreaTechnology-driven overweight market within MSCI EM
- Strengths
- Rose 13% for the week, and Korean technology is an important contributor to second-quarter EPS upside.
- Weaknesses
- Returns are highly dependent on technology and AI themes.
- Comparison
- Alongside Taiwan, it has led recent emerging-market performance.
- Risks
- Technology-cycle volatility, pullbacks in valuation expansion, and changes in foreign investor flows.
- TaiwanTechnology-driven overweight market within MSCI EM
- Strengths
- Rose 3% for the week, received US$5.4bn in foreign inflows, and Taiwanese technology also supported earnings improvement.
- Weaknesses
- Market performance may be concentrated in technology-hardware-related assets.
- Comparison
- Alongside South Korea, it is a technology-oriented market that the report highlights as overweight.
- Risks
- Semiconductor-cycle fluctuations, external demand, and changes in foreign investor flows.
- BrazilIdiosyncratic allocation opportunity and risk focus
- Strengths
- Valuation appears slightly inexpensive relative to ten-year rates; if local rates decline, rate-sensitive and domestic-demand sectors have historically generally benefited.
- Weaknesses
- Performance has materially lagged in August and since the year-to-date high, with banks recently adding to the drag.
- Comparison
- The extent of recent underperformance exceeds the typical explanatory range of the report's macro interest-rate model; performance across past election cycles has been highly dispersed.
- Risks
- Presidential election, rising implied volatility, higher long-end rates, political events, and reversal of fund flows.
Key data
- MSCI EM Weekly Performance+2.7%South Korea +13%, Taiwan +3%; Brazil -4%, South Africa -3%, China -3%.
- MXEF Forward P/E10.1xApproximately two standard deviations below the ten-year average.
- Foreign Inflows into Emerging-Market EquitiesUS$8.4bnPrimarily driven by Taiwan at US$5.4bn, South Korea at US$4.2bn, and India at US$0.2bn.
- Median Second-Quarter Year-over-Year Earnings Growth+17%Compared with +11% at the start of the reporting season.
- Median Second-Quarter Earnings Surprise+2%MENA and North Asia were both at +7%.
- Reported CoverageMore than 550 companies, about 75% of MSCI EM market capitalizationHave completed second-quarter earnings disclosure.
- 2026 EPS RevisionsApproximately +7% since JuneThe report also notes a +0.4% upgrade during the week.
- MSCI Brazil DrawdownApproximately -8% in August; approximately -18% from the mid-April highRecent underperformance exceeds the extent typically explained by the interest-rate macro model.
Impact & implications
Earnings upgrades, low valuations, and returning foreign inflows together provide positive support for emerging markets, particularly benefiting North Asian markets with high technology weights and clear earnings improvement. At the portfolio level, the report emphasizes diversification and a tilt toward technology hardware, banks, capital goods, and metals and mining. Brazil's valuation and potential benefits from lower rates provide a medium-term opportunity, but the election process, long-end interest rates, and political news may dominate near-term returns and volatility, making position sizing and risk management important.
Risks
- The emerging-market rebound remains concentrated; North Asian markets could come under pressure if AI or the technology supply chain corrects.
- Foreign investors have only just turned to net inflows, and the durability of these flows remains to be verified.
- After Brazil's election formally begins, political uncertainty could lift implied volatility and increase dispersion across stocks and sectors.
- Further increases in Brazilian long-end rates would weigh on valuations, particularly in rate-sensitive sectors such as telecommunications and utilities.
- The historical election performance described in the report is highly dispersed, and historical patterns do not guarantee future returns.
- Geopolitical developments and changes in global risk appetite could affect emerging-market valuations and fund flows.
What to watch
- Whether earnings growth, earnings surprises, and 2026–2027 EPS revisions continue in subsequent MSCI EM company disclosures.
- Whether South Korean and Taiwanese technology sectors continue contributing to index earnings upgrades and market returns.
- The persistence of foreign inflows into Taiwan, South Korea, India, and other emerging markets.
- Changes in MSCI EM market breadth, EEM option implied volatility, and funding spreads.
- Political developments and market pricing following the registration of Brazilian presidential-election candidates.
- Brazilian long-end rates, the degree of Bovespa's divergence from the macro model, and performance of banks and rate-sensitive sectors.