MSCI EM Flat for the Week, but Earnings Upgrades and Broadening into Cyclicals Strengthen Medium-Term Support

Overview

The report reviews MSCI EM's weekly performance, Q2 earnings, earnings revisions, valuations, fund flows, and market breadth, and provides country and sector allocation recommendations for the next 12 months. At the index level, performance was broadly flat this week, but internal performance diverged significantly: a pullback in South Korean technology weighed on the market-cap-weighted index, while South Africa, Chile, the Middle East, and Emerging Europe, which are commodity-sensitive or have stronger earnings, rose, indicating the rally is beginning to broaden beyond the technology sector.

Core views

First, Q2 earnings fundamentals were stronger than expected; except for Latin America, which was broadly in line with expectations, earnings tracking values in most regions were above levels at the start of the season, with median earnings surprises in the Middle East and North Africa and North Asia both reaching 7%. Second, earnings upside is no longer limited to North Asian technology, with financials, industrials, and energy also making important contributions. Third, South Korea and Taiwan technology still contributed about 20 percentage points of the approximately 25 percentage points of positive surprise, indicating earnings concentration remains high. Fourth, MSCI EM trades at a forward P/E of about 10x, roughly 2 standard deviations below its 10-year average, and remains at a discount to the U.S. and other major developed markets. Fifth, in allocation, the report maintains a pro-cyclical and diversified stance, but investors should be alert to foreign outflows, narrow market breadth, and geopolitical and election risks.

Analysis framework

Using data from FactSet, I/B/E/S, MSCI, Bloomberg, and EPFR, the report conducts cross-analysis across dimensions including company reporting progress, earnings growth and surprises, regional and sector contributions, earnings revision trends, forward valuations, fund flows, technical market breadth, and historical performance around interest rate and election events, while incorporating earnings growth, valuation, foreign exchange, and dividends into 12-month total return forecasts.

Methodology notes

• Earnings AnalysisEarnings Surprise Contribution Decomposition

  Decomposes changes in earnings growth from the start of the season to the current period and their index contributions by country and sector.

  This method is used to identify the sources of earnings upgrades. South Korean technology, Taiwan technology, China financials, and South Korean industrials are the main positive contributors, while Brazil materials, South Korean energy, and Turkish banks are drags.

• Earnings RevisionsEarnings Revision Leading Indicator (ERLI)

  Uses Asia earnings revision leading signals to assess the future direction of analyst forecast adjustments.

  The indicator suggests that Asian earnings forecasts may continue to be upgraded, though the pace of upgrades may slow, with North Asia maintaining its lead.

• Valuation AnalysisForward P/E and Valuation Z-Score

  Compares current forward valuations with their own long-term history and other markets.

  MSCI EM trades at roughly a 10x forward P/E, about 2 standard deviations below its 10-year average, and remains discounted relative to U.S. equities after sector adjustments.

• Market StructureMarket Breadth and Equal-Weight Index Analysis

  Compares market-cap-weighted indices, equal-weight indices, the distance of constituents from their 52-week highs, and the proportion of stocks above their 200-day moving averages.

  The equal-weight index rose 3% this week, indicating some broadening of the rally, but overall market breadth remains below historical levels, and the proportion of stocks above their 200-day moving averages is also below the five-year average.

• Asset Allocation12-Month Total Return Forecast

  Estimates USD total returns by combining local index targets, foreign exchange returns, and dividend yields.

  MSCI EM's index target of 2,000 points from 1,658 points corresponds to an approximately 19% index return, and after adding foreign exchange and dividend factors, the expected USD total return is about 23%.

• Event StudyHistorical Analysis of Brazil Rate Cuts and Election Cycles

  Compares the historical performance of Brazilian equities after the first rate cut, declines in five-year rates, and around past presidential elections.

  Historically, Brazilian equities have often risen after the first rate cut, and rate-sensitive and domestic-demand-related sectors have typically outperformed the market; however, returns during election cycles have varied widely, and volatility has often risen five to six months before October elections.

Asset mapping & comparison

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

• MSCI EM

  Core benchmark, 12-month target of 2,000 points

  Strengths

  Earnings forecasts continue to be upgraded, valuations are below long-term averages, and the index remains discounted relative to U.S. equities after sector adjustments.

  Weaknesses

  Weekly performance was weighed down by declines in South Korean technology, market breadth remains narrow, and foreign capital is flowing out.

  Comparison

  The equal-weight index rose 3% this week, outperforming the market-cap-weighted index's -0.2%, reflecting a broadening of return sources.

  Risks

  Earnings concentration, geopolitical conflicts, capital outflows, and a decline in global risk appetite.

• Taiwan and South Korean equities

  Market overweight, major beneficiaries of technology earnings upside

  Strengths

  South Korean and Taiwan technology together contributed about 20 percentage points of the approximately 25 percentage points of positive earnings surprise; the 12-month USD total return forecasts for Taiwan and South Korea are 20% and 98%, respectively.

  Weaknesses

  South Korea fell 8% this week, and the technology sector is highly volatile; mutual funds remain significantly underweight Taiwan and South Korea.

  Comparison

  Earnings contributions are significantly ahead of other countries and sectors, but concentration is also the highest.

  Risks

  Technology cycle reversal, high base effects, lower earnings expectations, and continued foreign outflows.

• Brazilian equities

  Market overweight, benefiting from rate cuts and the domestic demand cycle

  Strengths

  Copom cut rates by 25 basis points, and historically equities have usually strengthened after the first rate cut; the 12-month USD total return forecast is 25%.

  Weaknesses

  Brazil fell 1% this week, earnings forecasts for the materials sector were revised down, and financial earnings growth was also slightly lowered.

  Comparison

  Brazilian equities have the highest negative correlation with local rates among emerging markets, and rate-sensitive and domestic-demand sectors have historically delivered approximately two to three times the market's performance.

  Risks

  Rising volatility before elections, uncertainty over fiscal and interest rate paths, and weaker commodity prices.

• South African and Chilean equities

  Beneficiary markets linked to gold, copper, and materials prices

  Strengths

  They rose 8% and 5%, respectively, this week, supported by commodity-sensitive sectors and earnings updates.

  Weaknesses

  South Africa's median Q2 earnings surprise was -6%, and some materials industries lack further earnings upgrades.

  Comparison

  They significantly outperformed South Korea and Latin American oil-exporting markets this week.

  Risks

  Metal price declines, slowing global demand, and currency volatility.

• Technology hardware and semiconductors, banks, capital goods, metals and mining

  Sector overweight basket

  Strengths

  They benefit respectively from North Asian technology earnings, contributions from China and Gulf financials, upgrades to industrial earnings, and strength in commodity-sensitive markets.

  Weaknesses

  Technology hardware has high concentration and volatility, banks are affected by interest rates and the credit cycle, and metals and mining are sensitive to commodity prices.

  Comparison

  Compared with defensive sectors, this basket has more pro-cyclical characteristics; real estate is maintained at neutral, while software and services are underweight.

  Risks

  Slowing economic growth, reversal of earnings upgrades, falling commodity prices, and valuation repricing.

Key data

• MSCI EM weekly performance-0.2%The index was broadly flat, but regional and sector performance diverged significantly.
• Non-technology emerging markets weekly performance+2%The technology sector fell 3%, while the rally broadened into pro-cyclical sectors.
• MSCI EM equal-weight index weekly performance+3%Up 5% cumulatively from the July 28 low.
• Earnings reporting coverage388 companies, representing 60% of MSCI EM market capitalizationThe number of companies accounts for approximately 33% of total index constituents.
• Q2 earnings growth tracking value89%The expectation at the start of the season was 64%.
• Median Q2 earnings growth17%The expectation at the start of the season was 11%.
• Median earnings surprise+1%The Middle East and North Africa and North Asia were both +7%, Latin America was -5%, and South Africa was -6%.
• Proportion of earnings beats and misses46% vs. 33%The proportion of revenue beats and misses was 44% vs. 15%.
• 2026 earnings forecast revisionsUpgraded 7% since JuneMainly driven by North Asia, Central and Eastern Europe, parts of Latin America, and industrials, technology hardware, and energy.
• Forward valuationApproximately 10x P/EAbout 2 standard deviations below the 10-year average.
• Weekly foreign flows into emerging market equitiesNet outflow of US$3.7bnSouth Korea saw outflows of US$5.1bn; India, Taiwan, and the UAE saw inflows of US$1.2bn, US$0.3bn, and US$0.1bn, respectively.
• 12-month MSCI EM target2,000 pointsThe current level is 1,658 points, with an expected USD total return of 23%.

Impact & implications

Earnings upgrades, low valuations, and broadening market participation jointly support medium-term returns in emerging markets, but allocation value is highly differentiated. North Asian technology remains the core driver of earnings growth, while financials in China and the Gulf region, South Korean industrials, and energy in Brazil and India have added sources of upside. Portfolios should retain exposure to technology hardware and semiconductors, while diversifying through banks, capital goods, metals and mining, and markets such as Brazil and South Africa. Given that foreign investors are still net sellers and market breadth remains below historical levels, the short-term rebound in the equal-weight index should not be directly interpreted as confirmation of a broad bull market.

Risks

• South Korean and Taiwan technology still contribute most of the earnings upside; if technology earnings fall short of expectations, index-level revisions may reverse quickly.
• Emerging market equities saw net foreign outflows of US$3.7bn this week, and continued selling since the Iran war may constrain valuation recovery.
• Market breadth remains below historical levels, and the proportion of stocks above their 200-day moving averages is below the five-year average.
• Only about 33% of companies have completed reporting so far; China's earnings season will accelerate in the coming weeks, and existing earnings conclusions may still change.
• Earnings surprises in Latin America and South Africa are negative, and forecasts for sectors such as Brazil materials, South Korean energy, and Turkish banks have been cut.
• The U.S.-Iran situation, energy price shocks, and Federal Reserve policy expectations could change the direction of pro-cyclical trades.
• Historically, volatility has often risen five to six months before Brazilian elections, and political and fiscal uncertainty may offset the benefits of rate cuts.

What to watch

• China's intensive Q2 earnings releases over the next few weeks and their impact on MSCI EM earnings growth.
• Whether Asia's earnings revision leading indicator continues to point to upgrades, and whether the pace of upgrades slows further.
• Whether fund flows and share prices in South Korean technology can stabilize, and whether Taiwan technology earnings upgrades can continue.
• Whether the equal-weight index, non-technology index, and the proportion of stocks above their 200-day moving averages continue to improve.
• Whether foreign flows into emerging markets shift from net outflows to inflows, especially in South Korea, India, and Taiwan.
• The impact of the U.S.-Iran situation and oil, gold, and copper prices on energy- and materials-related markets.
• Brazil's subsequent pace of rate cuts, five-year rates, and election-related volatility.
• Whether earnings upgrades in financials, industrials, and energy can continue to broaden, thereby reducing the index's dependence on North Asian technology.