Emerging markets have not escaped the turbulence that has continued to rock global economies in recent months – but they have certainly fared better than their peers.
The MSCI EM Index is 10.4 per cent in the green this year, with the MSCI World Index trailing at a 6.3 per cent gain. The MSCI USA Index, despite having staged a recovery from lows in April, is sitting at a 2.2 per cent increase in 2025.
A strong believer in the outperformance potential of emerging markets, Goldman Sachs’ Stratford Dennis said there are three key reasons behind his optimism.
“When I think about any emerging markets’ equities outperformance, I think that there are three key ingredients,” the head of emerging market equities, global banking and markets said on a recent episode of the Goldman Sachs podcast.
“First is positive growth differentials when looking at emerging markets equities versus global equities or the S&P, we’ve got that. Typically a weaker dollar, which we’ve had. And third, you need the S&P to at least be flat, preferably up, and we’ve of course had that.”
As for whether this relief rally has legs, Dennis said Goldman Sachs has lifted its price target for MSCI Emerging Markets, now anticipating a 10 per cent rally by the end of the year.
Looking forward, he said, the three components giving him optimism will continue to be important into the future.
“I think that they will remain intact,” he said, adding that capital allocation in emerging market equities is “exciting” with indicators suggesting that sentiment may be starting to turn.
“If you look at the institutional community, we see underweight emerging markets equities, particularly in the mutual fund area, and then if you look at hedge funds and fast money, we really haven’t seen significant buying on this rally.
“We have started to see some upside call buying, and what gets us excited is that some of these upside call buyers are what we would call tourists, not EM focused funds. To the extent that we could see continued foreign money flows into EM, we think it could continue to rally,” Dennis said.
According to him, Brazil remains a particularly overlooked segment of the market and has been for some time – even as green shoots have begun to emerge.
Dennis noted that Brazil’s valuations look attractive as the economy nears the end of its rate hiking cycle, with general elections also set for next year.
“There is potential for a market friendly candidate to perhaps come into play and, certainly if that happens, again, looking at positioning, this is something that absolutely nobody owns, so we think that if the stars can kind of align, we see significant upside in Brazilian equities.”
Ultimately, Dennis suggested that there is potential for “fundamental change” in the global equities order.
“We, again, have positive growth differentials. We should have positive earnings differentials. So both from kind of a macroeconomic and a micro perspective, we have emerging markets in a better place than the US.”
“We have been, as a marketplace, underinvested in emerging markets equities for quite some time. And to the extent that this kind of question about US exceptionalism results in institutions adjusting their EM portfolios and increasing their exposure to emerging markets.
“That is a multi-year trade that should lead to emerging market equities outperforming.”
