Reading Notes: EM Equity Strategy
Review of Goldman Sachs 2025 EM Equity Outlook
The document is structured into the following main sections:
2025 Views at a Glance
Challenging External Macro Environment
Moderate Index Returns Analysis
Allocation and Key Market Views
Themes and Implementation Ideas
Appendix of Macro Forecasts
Section Reviews
2025 Views at a Glance: Goldman Sachs projects a challenging backdrop for emerging market equities in 2025, characterized by a stronger dollar, higher China and auto tariffs post-US elections, and shallower easing cycles. They expect MSCI EM to reach 1200 by end-2025, implying approximately 9% price returns and 11% USD total returns. The analysis indicates that markets with strong domestic micro fundamentals and relative insulation from external risks are best positioned to outperform. The firm maintains overweight positions in China and domestic ASEAN within Asia, South Africa, and parts of the Middle East within CEEMEA, and Chile in LatAm (Page: 3).
Challenging External Macro Environment: The external macro environment presents significant headwinds for EM equities in 2025. Global GDP growth is expected to remain stable at 2.7%, with US outperformance relative to consensus at 2.5%. However, sluggish growth in the Euro area (0.8%) and slower Chinese growth (4.5% from 4.9%) create challenges. US long rates are projected to remain high at 4.3%, with a slower pace of Fed rate cuts and a stronger dollar than previous expectations. This combination of slower regional growth, higher US rates, shallower easing cycles, and a stronger dollar creates a less favorable environment for EM equities (Page: 4-6).
Moderate Index Returns Analysis: The analysis projects moderate index returns driven primarily by earnings growth. MSCI EM earnings are forecast to grow 10% in both 2025 and 2026, with Index EPS of $100 in 2026. These projections are 2pp below consensus estimates. Valuations are expected to remain largely stable with a target multiple of 12x, suggesting returns will be primarily earnings-driven. Regional variations show higher growth expectations in MENA but lower forecasts for EM Europe, LatAm, and Asia (Page: 10-12).
Primary Document Thesis and Supporting Arguments: The primary thesis is that EM equities will deliver moderate returns in 2025, with performance heavily dependent on domestic policy support and micro fundamentals amid challenging external conditions.
Quantitative Arguments
GDP growth differential between EM and DM is expected to worsen, suggesting likely EM underperformance (Page: 5)
MSCI EM earnings are projected to grow 10% in 2025/26, 2pp below consensus (Page: 15)
Target MSCI EM index level of 1200 by end-2025, implying 9% price returns (Page: 13)
Qualitative Arguments
Markets with strong domestic fundamentals and policy support will outperform (Page: 7)
China’s policy stimulus could partly offset external headwinds (Page: 8)
Regional dispersion is expected to remain wide with significant variation in market performance (Page: 9)
The Significance for Energy, Materials, and Industrial Industries
The analysis suggests significant implications for energy, materials, and industrial sectors in emerging markets. China's policy stimulus package, including a Rmb 10tn local government debt resolution and infrastructure support, is likely to create opportunities in materials and industrials. The copper sector appears particularly attractive, with Chile and Peru offering exposure to high-quality copper assets within EM. Defense spending is expected to remain elevated globally, creating opportunities in the aerospace and defense industries (Pages 21-23).
The commodity outlook presents a mixed picture, with copper showing strong potential (25% upside targeted) while oil prices are expected to remain range-bound between $70-85/bbl. This divergence creates specific opportunities in materials-focused markets like Chile while potentially pressuring energy-heavy markets like Colombia(Page: 24).
Macro Economic Implications
The macroeconomic landscape presents several significant implications. The US dollar is expected to strengthen, potentially pressuring EM currencies and creating headwinds for dollar-denominated debt. Interest rates are projected to remain higher for longer, with US 10-year rates expected at 4.3% in 2025, affecting funding costs and capital flows (Page 6).
Geopolitical tensions, particularly US-China trade relations, are expected to impact global trade patterns. The base case assumes a 20pp increase in effective tariff rates on Chinese exports to the US, with potential spillover effects on global supply chains (Pages 7-8).
Overall Probabilistic Assessment
Based on the analysis presented, the likelihood of achieving the projected 9% price return for MSCI EM is assessed as Probably (56% to 75%). This assessment considers several key factors:
The probability of China delivering sufficient policy support is rated as Highly Likely (76% to 95%), given the government's demonstrated commitment to supporting growth(Page: 15)
The risk of higher US tariffs materializing is assessed as Highly Likely (76% to 95%), based on the political outlook(Page: 7)
The likelihood of achieving projected earnings growth is rated as Probably (56% to 75%), considering the below-consensus forecasts(Page: 13)
Strategic Recommendations
Long copper exposure through Chilean equities with a Highly Likely (76% to 95%) probability of positive returns given strong fundamentals and policy support(Page: 24)
Overweight domestic ASEAN markets (Indonesia/Philippines) with a Probably (56% to 75%) chance of outperformance based on attractive valuations and defensive characteristics(Page: 16)
Position in defense sector stocks across EM with a Highly Likely (76% to 95%) probability of positive returns given elevated geopolitical risks(Page: 23)
Long South Africa vs. Poland pair trade with a Probably (56% to 75%) chance of success based on diverging growth trajectories(Page: 24)
Selective exposure to China policy beneficiaries with a Probably (56% to 75%) probability of positive returns contingent on stimulus effectiveness(Page: 21)
Scenarios Considered in Probabilistic Judgments
Base case: 20pp increase in US tariffs on China with offsetting domestic policy support
Upside scenario: Limited tariff implementation with strong policy stimulus
Downside scenario: Aggressive tariff implementation (60%+) with limited policy offset
Regional growth scenarios: Varying paths for US, Europe, and China growth
Commodity price scenarios: Different trajectories for copper vs. oil prices
Policy response scenarios: Varying effectiveness of Chinese stimulus measures
Probability Note: Probabilities are purely subjective; they should be interpreted as Massif Capital’s best estimate of the probability that the author of the reviewed document might assign to his or her claim; they are not necessarily the Massif Capital expectations. Folded into the probabilities is textual sentiment analysis run via an LLM. The probabilities consistently tilt more optimistic than reality. The probabilistic framework we use is as follows:
Almost Certain (96% to 100%)
Highly Likely (76% to 95%)
Probably (56% to 75%)
About Even (46% to 55%)
Probably Not (36% to 45%)
Unlikely (36% to 5%)