Key Takeaways: Citi upgrades China to overweight with HSI year-end target at 29,600 and CSI 300 at 5,600. The bank tactically downgrades Korea to neutral, citing rising AI volatility and concentrated market risks. MSCI EM index target stands at 1,870, implying about 12% upside from current levels.
Citi upgraded China equities to overweight and tactically downgraded South Korea to neutral, betting the emerging-market rally will broaden beyond the tech-heavy leaders that have driven this year's gains.
The MSCI Emerging Markets index has climbed about 20% year-to-date, one of its strongest first-half performances on record, but the advance has been "extremely concentrated" in Korea and Taiwan, according to a July 19 report from Citi Research. The cross-sectional dispersion of returns among major EM markets has reached the highest level in 25 years, the bank said.
"The broadening of the EM rally is the core question for the second half," strategists led by the firm's EM equity strategy team wrote. "We see China as a strong candidate for this broadening given light positioning, improving macro conditions, and attractive valuations."
Citi raised China to overweight from neutral, setting a Hang Seng Index year-end target of 29,600 and a CSI 300 target of 5,600. The bank's MSCI China target of $92 implies about 31% upside. The upgrade marks a reversal from Citi's cautious stance on China this year, which was driven by weak relative earnings momentum.
The bank simultaneously cut Korea to tactical neutral from overweight, a position it had held since July 2025. The KOSPI's implied volatility has surged well above global peers, pressured by three factors: questions about the sustainability of AI capital expenditure, local opposition to data center construction, and the rising threat from open-source models to frontier AI labs. Retail investor flows into leveraged ETFs have amplified the swings, Citi said.
Korea's local strategists maintained their KOSPI year-end target of 10,000, implying about 47% upside, and expect the memory chip shortage to intensify through 2027. Memory makers are projected to post operating profit of 58.53 trillion won in 2026 and 76.36 trillion won in 2027, accounting for 65% of KOSPI 200 total operating profit.
The concentration problem is most visible in earnings revisions. MSCI EM 2026 earnings-per-share growth expectations have been revised up by 28 percentage points since late February, but about 85% of that came from the information technology sector. Only 42% of EM sectors are seeing net earnings upgrades, with technology and financials the only sectors with clear positive momentum, Citi data show.
Mexico was raised to neutral from underweight, with the IPC index target set at 70,000 for year-end 2026. The country has been the worst EM performer this year, dragged by uncertainty over USMCA renegotiation and tighter policy expectations. But like China, Mexico scores well in Citi's "broadening candidate" framework and has the lightest positioning in EM, the bank said.
Citi maintained its MSCI EM year-end target at 1,870, implying about 12% upside, and introduced a mid-2027 target of 2,050. The targets assume conservative EPS growth of about 40% to 45%, below the consensus estimate, and a modest contraction in valuation multiples.
The bank remains neutral on EM relative to global markets, citing AI volatility risk and macro complexity from geopolitics, Federal Reserve policy, and weather-related disruptions. A return to overweight would require evidence of a genuine inflection in earnings across a broader set of markets, Citi said.
The upgrade positions China as the primary beneficiary if the EM rally does broaden. Investors will watch for further signs of earnings momentum outside the tech sector and for policy support from Beijing, where Citi economists expect rate cuts and accelerated fiscal deployment in coming months.
This article is for informational purposes only and does not constitute investment advice.
