Emerging-market equity allocation and market outlook: EM rose 1.3% as North Asian technology led, while Brazil election positioning and a sharp US-yield rise shape the near-term outlook.

Overview

This weekly emerging-markets strategy update reviews market performance, earnings, valuation, flows and allocation preferences. Goldman Sachs sees supportive earnings and relative valuations behind a constructive selected-EM stance, but emphasizes the sensitivity of EM equities to the sharp rise in US yields and the potential for election-driven dispersion in Brazil.

Core views

MSCI EM gained 1.3% week on week, with AI-exposed North Asia leading: Korea rose 4% and Taiwan 2%. By contrast, rate-sensitive Indonesia fell 4% and South Africa declined 2% as US bond yields rose. The report characterizes year-to-date EM returns as earnings-driven. EM 2026 earnings per share estimates were revised up 0.1% week on week, and the broader exhibits indicate that 2026/2027 EPS revisions have improved over the past month, led by Korea. MXEF traded at 9.9x forward P/E, 2.1 standard deviations below its 10-year average; Goldman Sachs also notes that EM valuations remain at a discount to US equities even after sector adjustment. Flows were positive at the aggregate level, with US$1.5 billion of foreign institutional inflows into EM equities. Taiwan received US$1.7 billion and India US$0.4 billion, while Korea recorded US$0.5 billion of outflows. The report notes that global mutual funds remain substantially underweight EM, while GEM funds have recently seen outflows despite having earlier reached their fastest annual buying pace in two decades. It also highlights narrow market breadth: the rally has been concentrated in AI and technology pockets, although there are signs of broadening, and the share of stocks above their 200-day moving average remains below its five-year average. Brazil is the principal tactical focus ahead of the October 4 first-round election. Brazilian equities have retained gains of more than 10% since mid-August, accompanied by US$1.8 billion of steady foreign inflows, though rate-sensitive segments remain down year to date. Historical election cycles suggest MSCI Brazil has typically gained 4-7% in BRL and 6-9% in US dollars between the first and second rounds; the 2022 cycle saw gains of roughly 10% in BRL and 15% in US dollars before a later reversal. On a median basis, energy and rate-sensitive sectors—utilities, financials and consumer discretionary—have led between rounds. Following the second round, however, outcomes have produced significant dispersion: prior right-leaning victories in 2006 and 2018 coincided with strong rallies, while the left-leaning 2022 outcome coincided with a sell-off. The report observes that a narrowing poll gap has lifted election-related volatility, but positioning still indicates investor interest in further equity upside: the EWZ Brazil ETF saw net unit creation and open interest in EWZ and Bovespa call options remained elevated. Brazil’s rate sensitivity is also central to Goldman Sachs’ thesis. Brazilian equities have the highest negative correlation to local rates among EM markets; historically, lower rates have been associated with stronger equities, especially in domestic and rate-sensitive shares. In prior cutting cycles, rate-sensitive and domestically exposed stocks outperformed the headline index by about two to three times on average. The second tactical focus is the US yield shock. The US 10-year yield reached 5.18% during the week, retreated modestly, but remained above 5%. Its 50bp increase over the preceding month was a 2.4-standard-deviation move based on two-year monthly changes. Goldman Sachs argues that both the speed and level of yield increases matter for EM: historical monthly increases of two standard deviations or more have tended to weigh on EM equities, and correlations have been more negative when US 10-year yields exceed roughly 4.5-5%. The report qualifies this relationship by noting that EM equities have tended to hold up better in rising-rate periods when the global and US growth backdrop remains robust. For allocation, Goldman Sachs emphasizes diversification and remains overweight technology-heavy Taiwan and Korea as well as idiosyncratic opportunities in Brazil, South Africa, Hungary and Greece. At the sector level, the strategy is procyclical and overweight Tech Hardware & Semis, Banks, Capital Goods, and Metals & Mining. The sector table shows particularly strong stated earnings growth expectations for Tech Hardware & Semis, with CY2026E EPS growth of 241% and CY2027E growth of 48%, while the sector traded on 8.7x NTM P/E. The report is underweight Autos & Components, Health Care, Transportation, and Software & Services.

Analysis framework

The report combines weekly performance and flow monitoring with earnings-estimate revisions, forward valuation comparisons, historical event studies and cross-market allocation analysis. It assesses Brazil through prior election-cycle returns, sector leadership, foreign flows and options positioning, while evaluating the US-yield shock through the size of the move, historical yield-equity correlations and the prevailing growth backdrop.

Methodology notes

• Valuation methodsP/E and PEG Valuation

  Forward P/E, PEG ratios and 10-year valuation z-scores

  The report compares EM and sector valuations using forward earnings multiples and historical valuation deviations to assess relative market pricing.

• Event-Driven and Behavioral FinanceEvent-driven analysis

  Historical Brazilian election-cycle performance and sector dispersion

  Goldman Sachs compares market behavior between election rounds and after election outcomes to frame the possible impact of the current Brazil election cycle.

• Other

  Yield-sensitivity and equity-return correlation analysis

  The report evaluates how the speed and level of US and local yield changes have historically related to EM and Brazilian equity performance.

Asset mapping & comparison

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

• MSCI EM

  Core emerging-market equity benchmark assessed for performance, earnings, valuations, flows and breadth.

  Strengths

  Earnings revisions have improved and valuations remain relatively low versus history and US equities.

  Weaknesses

  Market breadth remains narrow and performance has been concentrated in AI and technology pockets.

  Comparison

  Trades at a discount to US equities, including on a sector-adjusted basis.

  Risks

  Sharp US-yield increases have historically weighed on EM equity performance.

• Brazil equities / MSCI Brazil / EWZ

  Tactical election and local-rate-sensitive market focus.

  Strengths

  More than 10% gains since mid-August, foreign inflows, ETF unit creation and historically favorable performance in some pre-runoff periods.

  Weaknesses

  Rate-sensitive shares remain down year to date despite the recent rally.

  Comparison

  Brazil has the highest negative correlation to local rates among EM markets.

  Risks

  Election outcomes have historically driven substantial post-runoff dispersion and reversals.

• Taiwan and Korea

  Overweight technology-heavy EM markets.

  Strengths

  Led the week’s EM advance; Korea has driven recent EM earnings revisions higher.

  Weaknesses

  Foreign institutional flows showed Korea outflows during the week.

  Comparison

  Both are preferred over the broader EM benchmark in Goldman Sachs’ market allocation.

  Risks

  Technology-led market concentration and higher US yields may challenge performance.

Key data

• MSCI EM weekly return+1.3%Week on week; Korea rose 4% and Taiwan 2%.
• MXEF forward P/E9.9x2.1 standard deviations below its 10-year average.
• EM 2026E EPS revision+0.1%Week on week.
• EM foreign institutional flowsUS$1.5bnWeekly inflow, led by Taiwan at US$1.7bn and India at US$0.4bn.
• Brazil equity performance since mid-August10%+Held despite modest weekly consolidation; supported by US$1.8bn of foreign inflows.
• US 10-year Treasury yield5.18%Rose 50bp over one month, a 2.4-standard-deviation move, before a modest retreat.

Impact & implications

Goldman Sachs’ allocation stance favors selected technology-heavy North Asian markets and procyclical sectors where earnings momentum and relative valuations are supportive. Brazil offers a potential event-driven opportunity and a local-rate sensitivity theme, but the report stresses that election outcomes can sharply alter market dispersion. A persistently high or rapidly rising US 10-year yield is a broad risk to EM equities unless growth conditions remain strong.

Risks

• A rapid or sustained rise in US 10-year yields above the 4.5-5% range has historically been associated with more negative EM equity correlations and weaker returns.
• Brazil’s close election race has increased volatility, and historical returns have varied widely after the second round depending on the outcome.
• EM market breadth remains narrow, with fewer stocks above their 200-day moving average than the five-year average.

What to watch

• Brazil’s October 4 first-round election, polling trends and positioning in EWZ and Bovespa call options.
• The level and pace of US 10-year Treasury yields, particularly whether they remain above 5%.
• Whether global and US growth remains robust enough to offset the effect of higher yields on EM equities.
• Foreign institutional flows into Taiwan, India, Korea and Brazil.
• Further EM earnings revisions and evidence that the AI-led rally is broadening.