Citi: Upgrades China, Downgrades South Korea, Expects MSCI Emerging Markets Index to Have Another 12% Upside Potential This Year

BlockBeats News, July 20th. Citigroup stated that emerging market stocks have performed strongly this year, but the gains are still highly concentrated in South Korea, Taiwan, and the technology sector. The key for the second half of the year is whether the market can spread to more countries and industries.

Citigroup stated in a report on July 19th that the MSCI Emerging Markets Index has risen by about 20% so far this year. The bank maintains a neutral global allocation rating for emerging market stocks but expects the index to still have upside potential, with a target of 1870 points by the end of 2026, representing a 12% increase from the current level; the mid-2027 target is 2050 points.

The report mentioned that earnings in emerging markets are expected to grow by 63% in 2026, slowing to 24% in 2027. However, the upward revision in earnings mainly comes from the technology sector. Since the end of February, earnings expectations for 2026 in emerging markets have been raised by 28 percentage points, with the information technology sector contributing about 85%.

Citigroup has upgraded its rating on China from neutral to overweight, stating that China has the conditions to benefit from "market diffusion." The report pointed out that the Chinese market has a low position, not high valuation. If oil prices decline, global growth improves, and policy marginal enhancement occur simultaneously, Chinese stocks may benefit. Citigroup's China strategist expects the Hang Seng Index to have a target of 29600 points by the end of 2026 and a target of 30500 points in mid-2027.

At the same time, Citigroup has downgraded South Korea from overweight to neutral. The bank stated that the fundamentals of the South Korean semiconductor and memory sectors are still strong, but market volatility has significantly increased. Capital positions and retail leveraged products have amplified the volatility, so there is a need to tactically reduce risk exposure.

China Taiwan remains overweight. Citigroup stated that AI demand has expanded from GPUs to custom ASICs, TPUs, network chips, CPUs, advanced processes, and packaging, and the related supply chain still has strong profit support.

In terms of valuation, the MSCI Emerging Markets forward 12-month P/E ratio is around 11.5 times, essentially near its long-term average. South Korea and Brazil are relatively cheap, while Taiwan and India are relatively expensive.

Citigroup believes that AI trading may still maintain high volatility in the short term, but the fundamental support in the medium term has not disappeared. For emerging markets, the core variable in the second half of the year is whether funds can flow from the AI hardware and technology-concentrated areas to China, South Africa, Mexico, and some cyclical sectors.