Emerging markets are doing better than expected says Goldman Sachs

Goldman Sachs reports that emerging markets are outperforming expectations in 2025, forecasting 4% growth for the year, largely attributed to a 10% year-to-date fall in the trade-weighted US Dollar enabling policy easing. The firm recommends long positions in the Brazilian Real and South African government bonds, alongside an overweight stance on Chinese, Korean, and South African equities, anticipating a continued EM equity rally into year-end driven by interest rate cuts and sustained investor demand for diversification. Additionally, EM currency strength is aiding disinflation in CEEMEA and Latin America, with median inflation returning to around 3%.

Analysis

A recent Goldman Sachs research note indicates significant resilience in emerging markets (EM) for 2025, with growth forecasts revised to 4%, aligning with the region's long-run potential despite headwinds from US tariffs. This outperformance is primarily attributed to a 10% year-to-date depreciation in the trade-weighted US Dollar, which has provided EM central banks the flexibility to ease monetary policy and support domestic growth. Regional performance is led by Asia, benefiting from robust technology exports and declining oil prices, while Latin America and the CEEMEA region have softened but still exceeded initial expectations. Furthermore, the strength in EM currencies is contributing to disinflation, with median inflation in CEEMEA and Latin America returning to approximately 3% and expected to decline further. Goldman Sachs anticipates the rally in EM equities and foreign exchange will continue into year-end, supported by the ongoing interest rate-cutting cycle and sustained investor demand for portfolio diversification.

Key Decisions for Investors

• Investors should consider increasing exposure to specific emerging markets where Goldman Sachs holds an 'overweight' recommendation, namely Chinese, Korean, and South African equities, to capitalize on the expected continuation of the rally.
• Given the favorable macroeconomic backdrop of a weaker dollar and disinflation, it is prudent to evaluate specific tactical trades recommended by the report, such as long positions in the Brazilian Real and South African government bonds.
• Monitor the trajectory of the US Dollar and EM central bank policy, as their current accommodative stance is a key pillar of the bull thesis; any reversal in these trends could temper the positive outlook.