Goldman Sachs released a research report stating that despite emerging market assets delivering their strongest returns in nearly a decade in 2025, supportive global and local macroeconomic conditions are still expected to provide solid returns for emerging markets in 2026. The MSCI Emerging Markets Index is projected to achieve a 14% return in US dollar terms and a 17% total return, benefiting from a favorable global macro environment, robust AI demand supporting tech-heavy emerging markets, and the index's broad geographical diversification. In terms of equity market allocation, Goldman Sachs is optimistic about markets with high sensitivity to the technology sector, such as China, South Korea, and Taiwan. China is viewed favorably due to market-friendly policies, AI-driven growth, and an expanding share of export markets. Investors should also consider allocating some capital to domestically consumption-driven markets like South Africa, India, and Brazil. South Africa's cyclical economic recovery and interest rate cuts are expected to boost its lagging domestic demand sectors, while India benefits from a recovery in mass consumption. Brazil will gain from declining policy rates, although the presidential election in the fourth quarter of 2026 may introduce some uncertainty. In the currency market, the global outlook for 2026 provides a favorable environment for emerging market currencies, with those more sensitive to the economic cycle likely to outperform. This includes the South African rand, the Chilean peso, and the South Korean won. Within Asian markets, tech-related currencies such as the South Korean won, the New Taiwan dollar, and the Malaysian ringgit are expected to lead, while high-yield currencies may underperform. Finally, Goldman Sachs believes frontier market currencies, such as the Egyptian pound, remain an attractive source of carry yield with low correlation to other assets, and their improving fundamentals, including accumulating foreign exchange reserves, will provide further support. Last year was one of the strongest for local fixed income performance in emerging markets. With the easing cycles in most low-yield countries nearing their end, the bank believes performance will be driven by high-yield countries like Brazil and Hungary. Following strong FX performance last year, the central banks of these two countries might implement more substantial rate cuts in 2026. The bank sees risk-reward as still favoring maintaining long positions in emerging market short-duration bonds, as high real policy rates give policymakers ample room to adopt a more dovish stance if growth concerns resurface. 2025 was another year of resilience and solid performance for emerging market sovereign debt, which led to credit spreads tightening significantly compared to the start of last year, making their risk-reward asymmetry less attractive heading into 2026. Goldman Sachs recommends a defensive strategy aimed at capturing carry income while hedging against the risk of spread widening potentially triggered by volatility in US equities and interest rates. Within the Investment Grade (IG) segment, the bank favors Hungary and Peru. Within High Yield (HY), it favors Egypt, Kenya, Pakistan, and South Africa. The bank advises combining this strategy with hedges, particularly in Brazil and Colombia, to protect against shocks from US equity and rate volatility; and also in Angola, Bahrain, and Oman, to hedge against the oil price decline factored into its forecasts.
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