Citigroup has kept South Korea and Taiwan as its top overweight country calls inside emerging markets, reflecting the bank's view that those markets remain the primary beneficiaries of a tech-driven rally even as the broader emerging market advance has shown limited breadth.
The MSCI Emerging Markets index recently returned to record territory, but Citi strategists emphasize that a large share of the move "has been concentrated into the Tech sector," with Korea and Taiwan accounting for much of that outperformance. Cross-sectional return dispersion across EM markets has reached its highest level in 15 years, underlining how uneven the rally has been.
Drivers behind the calls
Citi places Korea and Taiwan at the top of its country allocation model primarily because of robust earnings momentum linked to the AI thematic and a semiconductor upcycle. The bank expects Korea to register the strongest EPS growth among EM countries in 2026, forecasting roughly 220% growth driven by demand for memory chips and long-term supply agreements that Citi believes will extend the upcycle beyond historical patterns.
Taiwan is projected to deliver about 50% earnings growth this year, with Citi seeing capacity constraints at advanced nodes for TSMC as persisting amid rising AI chip complexity.
EM stance and associated shifts
In a broader context, Citi maintains a Neutral view on emerging markets overall, a downgrade applied in an earlier report. The strategists point to elevated geopolitical risk from the U.S.-Iran conflict and the secondary effects of higher energy prices, which together raise the possibility of stagflationary pressures.
Citi noted that several of the pillars supporting a bullish case for EM equities have weakened, including GDP growth downgrades and repricing of expected rate paths. Before the Iran conflict, markets had anticipated most central banks would cut rates this year; Citi now observes expectations that the Fed funds rate will remain flat for the year and that many EM central banks face tighter monetary paths, an important shift complicating the equity outlook. The bank retains an Overweight on global Technology alongside its Korea and Taiwan calls.
Other allocation moves
- India was downgraded to Underweight from Neutral, with Citi flagging weak EPS revision trends and headwinds from elevated commodity prices that are weighing on growth and corporate margins.
- The United Arab Emirates was cut to Neutral, as Citi observed that EPS growth and revisions now rank last among peer markets.
- ASEAN was upgraded to Neutral from Underweight, supported by light investor positioning and relatively constructive reads from Citi's local strategists.
Outlook and cautions
Citi elevated its MSCI EM year-end target to 1,870, which the bank says implies roughly 10% upside, driven primarily by solid but below-consensus EPS growth. The strategists cautioned that volatility could return if commodity disruptions continue or if sentiment toward AI deteriorates sharply.
Overall, Citi's positioning underscores a concentrated tech leadership within the EM rally and a more guarded stance on the asset class as a whole, reflecting both sector concentration and external risks.