Strategists at UBS Group anticipate that the period of emerging-market equities outperforming broader markets will last significantly longer than their previous projections. The bank had initially maintained a bullish stance on this asset class only until the end of March but has now removed that time constraint.
UBS has held an overweight recommendation on developing-nation stocks since early September, originally expecting their strong performance to persist through the first quarter. However, this week the bank revised its view, with Manik Narain, head of emerging-market strategy, stating there are solid reasons to expect the rally to continue at least until year-end.
"We do not rule out the possibility that outperformance could last for several more quarters," said Narain, who is based in London. He explained that the earlier forecast was a tactical positioning intended to last a few months. "But given the data our technology team highlights about the strength of the tech cycle, we are extending that view. Strictly speaking, we are not setting a firm end date at this point."
UBS's move mirrors a similar shift by JPMorgan Chase & Co., which earlier this month returned to an overweight position on emerging-market currencies, acknowledging that its prior cautious stance had not played out as expected. This further indicates that investors and strategists have underestimated the rally in emerging-market assets, with many markets repeatedly hitting record highs.
On Friday, the MSCI Emerging Markets Index edged lower, though it remains up around 15% for the year, bolstered by strong gains in South Korean technology shares. A gauge of emerging-market currencies hovered near all-time highs as the U.S. dollar stabilized.
Narain noted that part of the rationale for the longer-term bullish outlook stems from the MSCI index experiencing the most significant upward revision in earnings-per-share estimates in two decades. While these upgrades have been led by South Korea and South Africa, he expects this momentum to attract passive fund inflows across the entire index.
He added that other potential tailwinds include a stronger Chinese yuan, improved consumer confidence in developing economies, and market expectations that sell-offs in Japanese and U.S. government bonds will be contained.
According to Narain, a key risk is that the Federal Reserve may cut interest rates less than anticipated, which could strengthen the U.S. dollar. Additionally, the MSCI index's strength is largely concentrated in South Korea, while several other markets—including India and Indonesia—have lagged behind.
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