MSCI EM fell about 4% for the week, but Goldman Sachs believes the pullback was driven more by positioning and momentum unwind, while earnings fundamentals remain intact.
AI summary card
MSCI EM fell about 4% for the week, but Goldman Sachs believes the pullback was driven more by positioning and momentum unwind, while earnings fundamentals remain intact.
The report emphasizes that near-term pressure on emerging markets comes from deleveraging in tech/North Asia and capital outflows, but 2Q earnings upgrades, lower valuations, and broader market participation in the second half still support a diversified, cyclical-tilted allocation framework.
- MSCI EM fell about 4.3% for the week, with Korea around -10% and Taiwan around -6%; tech-heavy North Asia was the main drag.
- EM equities saw about US$9.3bn of foreign outflows during the week, including about US$8.8bn from Taiwan and about US$0.4bn from Korea.
- MXEF is trading at 10.5x forward P/E, about 1.6 standard deviations below its 10-year average; 2026E EPS was upgraded by about 0.6% during the week.
- Tracked 2Q EPS growth is about 66% yoy; excluding the more volatile tech hardware and commodities segments, EM is still expected to deliver about 14% profit growth.
- Goldman Sachs maintains overweight positions in tech-heavy Taiwan and Korea, as well as idiosyncratic opportunities such as Brazil, South Africa, Greece, and Hungary.
Report interpretation
Overview
This is a Goldman Sachs weekly emerging markets report focused on the sharp decline in MSCI EM amid the fade in tech/North Asia momentum trades, capital outflows, earnings season progress, valuation levels, and regional/sector allocation. The report interprets the recent decline as primarily driven by position deleveraging rather than a break in fundamentals, and sees the 2Q earnings season as key to stabilizing sentiment and rebuilding cyclical momentum.
Core views
The report’s core views are: first, MSCI EM has corrected meaningfully from its June 22 peak, with the EM Momentum factor down even more, and AI capex winners and tech hardware-related assets under the greatest pressure; second, earnings momentum remains intact, with tracked 2Q earnings modestly revised up and analyst revision breadth turning positive; third, market leadership in the second half may broaden from tech and North Asia to cyclical laggards with improving fundamentals; fourth, allocation should continue to emphasize diversification, with market preferences for Taiwan, Korea, Brazil, South Africa, Greece, and Hungary, and sector preferences for Tech Hardware & Semis, Banks, Capital Goods, and Metals & Mining.
Analysis framework
The report combines index performance, regional and sector returns, earnings revisions, valuation multiples, fund flows, style factors, market breadth, option volatility, rate sensitivity, and historical election cycles to conduct a top-down allocation assessment of emerging markets. Market recommendations are supported jointly by 12-month total return forecasts, EPS growth, valuations, and positioning, rather than by price momentum alone.
Methodology notes
Judges whether fundamentals remain resilient through 2Q EPS yoy growth, 2026/2027 EPS revisions, and analyst revision breadth.
The report shows MSCI EM 2Q EPS growth tracking at about 66%, 2026E EPS upgraded by about 0.6% during the week, and earnings sentiment turning positive, supporting the view that fundamentals remain intact.
Uses forward P/E, the 10-year average, and valuation discount to assess risk-reward after the pullback.
MXEF trades at about 10.5x forward P/E, around 1.6 standard deviations below its 10-year average, and still at a discount relative to the US and developed markets.
Uses foreign outflows, fund inflows/outflows, and relative positioning of global funds to assess positioning pressure.
EM equities saw about US$9.3bn of foreign outflows during the week, with Taiwan and Korea accounting for most of the outflows, indicating that near-term pressure is related to deleveraging and position adjustment.
Observes the momentum factor, AI/tech baskets, and market breadth to determine whether the pullback is concentrated in crowded trades.
EM Momentum has been under pressure since June 22, with AI capex winners and North Asia tech-related assets posting the sharpest declines, while equal-weight indexes have been relatively stable, indicating concentrated pressure.
Forms market allocation preferences using local index targets, FX returns, dividend yield, and USD total return.
The table gives an MSCI EM 12-month target of 2,000 and a 23% USD total return forecast, and differentiates overweight, market weight, and underweight markets.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- MSCI EM / MXEFCore covered index
- Strengths
- Earnings revisions remain positive, valuations have corrected to a more attractive range, and the 12-month total return forecast is positive.
- Weaknesses
- In the short term it is dragged by heavy weights in tech/North Asia and the unwind of momentum trades.
- Comparison
- It still trades at a valuation discount relative to the US and major developed markets.
- Risks
- Oil prices, interest rates, geopolitics, continued foreign outflows, and an earnings season that disappoints expectations.
- TaiwanOverweight market with high exposure to tech hardware and semiconductors
- Strengths
- Strong CY2026/CY2027 EPS growth and a relatively high 12-month USD total return forecast.
- Weaknesses
- A large weekly decline, concentrated foreign outflows, and crowded tech positioning.
- Comparison
- Like Korea, it is part of the North Asia tech theme and a key contributor to EM earnings growth.
- Risks
- Cooling expectations for AI/semiconductor capex, continued foreign deleveraging, and FX volatility.
- KoreaOverweight market with North Asia tech and cyclical exposure
- Strengths
- Very strong earnings growth expectations, with the report’s table showing a significant 12-month USD total return forecast.
- Weaknesses
- Weekly decline of about -10%, with the sharpest momentum drawdown.
- Comparison
- Like Taiwan, it is a North Asia market with high tech weighting, but with greater near-term volatility.
- Risks
- A downturn in the tech cycle, FX pressure, and weaker global risk appetite.
- BrazilOverweight market, rate-sensitive and idiosyncratic opportunity
- Strengths
- The rate-cutting cycle and lower local rates may support equities, and valuations are relatively reasonable.
- Weaknesses
- Affected by US tariffs, the election cycle, and commodities volatility.
- Comparison
- Relative to North Asia tech, Brazil offers stronger style and regional diversification.
- Risks
- Election volatility, a rate path that falls short of expectations, and external trade shocks.
- India Banks vs. PharmaRelative trade recommendation
- Strengths
- Improving foreign flows into India, recovering bank fundamentals, and an attractive entry level for banks relative to pharma.
- Weaknesses
- India as a whole previously experienced large foreign selling, and market sentiment still needs to recover.
- Comparison
- The report prefers banks over pharma because of diverging fundamentals and pharma’s prior significant outperformance.
- Risks
- Foreign flows weakening again, bank earnings recovery coming in below expectations, and pharma continuing to outperform defensively.
- Tech Hardware & SemisOverweight sector
- Strengths
- Strong CY2026/CY2027 EPS growth and still the core contributor to EM earnings.
- Weaknesses
- Crowded positioning and a significant recent momentum pullback in AI/tech-related trades.
- Comparison
- Preferred by the report over Software & Services.
- Risks
- Slower AI capex, valuation compression, and orders or earnings missing expectations.
- BanksOverweight sector
- Strengths
- Lower valuations, stable earnings growth, and benefits from fund flows and cyclical recovery in some markets.
- Weaknesses
- Sensitive to interest rates, credit, and the macro cycle.
- Comparison
- Relative to defensive sectors such as pharma, the report is more inclined toward cyclical exposure such as banks.
- Risks
- A volatile rate path, deterioration in asset quality, and regulatory or capital constraints.
Key data
- MSCI EM weekly performance-4.3%Tech and North Asia were significant drags, with Korea around -10% and Taiwan around -6%.
- MSCI EM year-to-date performanceabout +15%Despite the weekly pullback, year-to-date returns remain positive.
- EM foreign outflowsUS$9.3bn w/wTaiwan at about US$8.8bn and Korea at about US$0.4bn were the main outflow markets.
- MXEF valuation10.5x forward P/EAbout 1.6 standard deviations below the 10-year average.
- EM 2026E EPS weekly revision+0.6% w/wEarnings expectations are still seeing positive revisions.
- MSCI EM 2Q EPS growth trackingabout 66% yoySlightly up from about 64% the prior week.
- EM profit growth excluding tech hardware and commoditiesabout 14% yoyShows that earnings growth is not entirely dependent on the more volatile tech hardware and commodities sectors.
- Median stock profit growth expectationabout 15% yoyReflects a certain breadth in earnings expansion.
- MSCI EM 12-month target2,000Equivalent to about 19% local index return and about 23% USD total return forecast.
- India foreign flowsturned mildly positive over the past monthThis followed cumulative selling of about US$30bn since late February.
Impact & implications
The implication for portfolios is that investors should remain alert in the short term to continued deleveraging in crowded tech/North Asia trades and fund flow volatility, but should not simply interpret the price pullback as fundamental deterioration. If the 2Q earnings season continues to validate profit growth and improving revision breadth, EM performance may broaden from the narrow AI/tech theme of the first half toward banks, capital goods, metals & mining, and some rate-sensitive markets.
Risks
- Continued deleveraging in tech- and AI capex-related trades, putting further pressure on North Asia markets.
- Foreign outflows spreading from Taiwan and Korea to the broader EM universe.
- Renewed increases in oil price and interest rate volatility, weighing on cyclicals and risk appetite.
- The 2Q earnings season failing to validate the current roughly 66% EPS growth tracking.
- US tariffs, geopolitics, and escalation in the US-Iran conflict affecting EM risk premia.
- Brazil’s election cycle bringing valuation and fund flow volatility.
- FX volatility eroding local market returns when translated into USD total returns.
What to watch
- Whether North Asia and the tech sector continue to see upgrades during the 2Q earnings season.
- Whether MSCI EM analyst earnings revision breadth can remain in positive territory.
- Whether foreign outflows from Taiwan and Korea slow or reverse.
- Whether the EM Momentum factor and AI/Tech-related baskets stabilize.
- Whether oil prices, US rates, and geopolitical conflicts remain under control.
- Whether improving foreign flows into India can continue, and the relative performance of Banks vs. Pharma.
- Brazil’s rate path, pre-election volatility, and foreign inflow trends.