Emerging Markets Stocks and Currencies Are Forecast to Rally

Emerging markets (EM) equities have rallied for nine straight months and are forecast by Goldman Sachs Research to rise through the end of 2025. Stocks from South Korea to South Africa are expected to gain amid strong company earnings, a weaker US dollar, and demand for geographical diversification.

“We think the EM equity rally can extend into the year-end as macro trends and capital inflows remain supportive,” Kamakshya Trivedi, chief foreign exchange and emerging markets strategist in Goldman Sachs Research, writes in a report.

Goldman Sachs Research raised its forecast for the MSCI EM index of large- and medium-size companies across emerging markets, which it expects to reach 1,480 over the next 12 months, up from 1,373 as of October 9.

EM currencies, which have strengthened against the US dollar this year, are also forecast to keep outperforming, driven in part by the strong performance of EM stocks.

What’s the forecast for EM equities?

The MSCI EM index has risen every month this year. It gained 7% in September alone as the US Federal Reserve delivered its first interest rate cut of 2025, contributing to a “risk-on” sentiment as investors sought out assets with higher potential returns relative to safer fixed-income investments. The rally was further fuelled by investor optimism about the prospects for artificial intelligence and strong foreign buying.

Trivedi’s team has raised its 12-month forecast for the MSCI EM index from 1,370 to 1,480, implying 8% price returns from current levels (in US dollars). The new forecast reflects upgrades to company earnings expectations due to stronger tech and demand for AI. Trivedi points out that stocks in South Korea, Taiwan, and China offer exposure to the burgeoning technology.

Goldman Sachs Research predicts earnings from EM companies—which Trivedi says are likely to be the key driver of stock market returns in the near term—to grow 9% this year and 14% in 2026.

Macroeconomic factors could also support EM stocks. The US Fed is forecast to cut rates further, creating room for further monetary easing and stronger growth across a number of emerging markets, Trivedi writes.

And the US dollar “will likely stay on the back foot” relative to emerging markets currencies amid a softening US labor market and a potential increase in investment flows into EM stocks and bonds as investors diversify away from the dollar. A weakening dollar can boost flows into EM stocks as investors look for higher returns outside the US.

Which Stock Markets Are Forecast to Grow?

Within Asian markets, Goldman Sachs Research sees investment opportunities in Chinese and Korean equities.

In Korea, 70% of stocks trade below book value (the implied value of a stock based on the company’s assets minus its liabilities). Ongoing reforms to the way companies are governed in Korea could also drive up the country’s equity prices, as could Chinese efforts to address disorderly price cutting and excessive competition among producers.

Meanwhile, Saudi Arabian equities could benefit from the potential easing of limits on foreign ownership of listed companies, which Goldman Sachs Research estimates could unlock passive inflows up to $10 billion to the Saudi markets.

“On balance, this should be supportive of Saudi equities—which have lagged EM in the year to date—and fits with our regional diversification theme,” Trivedi writes.

On the other hand, Indian equities have lagged other emerging markets this year. High valuations, higher-than-expected tariffs, and challenges for the software sector from the increased price of US H1B visas suggest that a broad recovery might not be imminent.

Beyond Asia, the team anticipates continued gains from South African stocks as rising gold prices help mining companies and inexpensive domestic sectors could benefit from a potential growth recovery and lower borrowing costs.

Why are emerging currencies strengthening against the US dollar?

Emerging market currencies outperformed their peers from major developed economies in September, and Goldman Sachs Research anticipates that this outperformance could continue.

There are three key factors supporting the appreciation of EM currencies relative to their DM peers. Firstly, high levels of carry (when investors borrow currency in a country with lower interest rates in order to invest somewhere with higher rates) are contributing to the attractiveness of emerging markets currencies relative to other major currencies.

Secondly, the team notes that the US dollar has been acting more like a cyclical currency lately—one which appreciates as the economy grows and declines when the economy is under pressure—particularly when a shock emanates from the US.

As a result, EM currencies are likely to weaken less significantly against the dollar in the event of changes to risk sentiment or downward revisions to growth expectations in the US.

And finally, the strong performance of EM equities is also likely to have played a role in the appreciation of EM currencies relative to their developed market peers.

The team has found that there is a relationship between the performance of EM currencies and relative equity returns. In short, “the best environment for EM foreign exchange is when both the MSCI EM and S&P indices are going up and MSCI EM is outperforming,” Trivedi writes.
 

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