UBS has turned bullish on emerging markets (EM), including India, as it finds benign macro trends, positive momentum in earnings revisions, and resilient EM currencies helping these economies sustain higher valuations and attracting flows.
Photograph: Arnd Wiegmann/Reuters
Among regions, it has upgraded Mainland China to ‘attractive’ and China Tech to ‘most attractive’, while downgrading Philippines to ‘neutral’.
“We upgrade EM equities (MSCI EM) to attractive, reflecting a constructive macro backdrop, and improving financial conditions on the back of Fed easing and a softer US dollar.
“Our preferred markets are Mainland China, India, Brazil, and Indonesia,” wrote analysts at UBS in a recent note.
The recent goods and services tax (GST) simplification, income tax reductions, and central bank easing are set to boost consumption in India, said UBS, which supports their ‘attractive’ view on Indian equities amid expectations for earnings recovery.
That apart, growing confidence in China tech leaders’ ability to monetise artificial intelligence (AI), alongside accelerating innovation and China’s commitment and ongoing progress toward tech self-sufficiency, remain key supports for the asset class, UBS said.
“Improving global and domestic liquidity, persistent underweight positioning by global investors, and a renewed search for geographical diversification further underpin the outlook.
“In our base case, despite recent flare-ups, we still think a full-scale US-China trade war looks unlikely,” UBS said.
The case for investing in EM equities, UBS believes, has evolved significantly since the launch of the asset class as a large number of EM stocks are much more than a play on commodities and financials.
Nearly half of the MSCI EM Index, UBS said, now comprises technology, tech-focused consumer, and telecommunications-related companies, which are at the forefront of artificial intelligence innovation and play a pivotal role in global technology and AI supply chains.
“In sum, alongside the US, emerging markets are among the few regions globally offering direct exposure to structural tech growth,” UBS said.
EM are also portfolio diversifiers, UBS argues, as it comprises domestically-driven economies like India, more cyclical ones like Brazil, or a blend of multiple factors like Mainland China.
“While volatility can increase during periods of global stress, local factors often take precedence in stable times, helping to balance portfolios,” UBS said.
Index targets
Reflecting these positive dynamics, UBS has raised their MSCI EM targets to 1,420 for December 2025 (up 2.2 per cent from the current 1,389) and 1,470 levels for June 2026, underpinned by expectations of superior earnings growth in 2026 at 14 per cent, up from 10 per cent in 2025, as AI adoption and monetisation accelerates.
UBS said that EM equities, year-to-date (YTD), have shown strong leadership, rising around 28 per cent in US dollar terms, with most EM regions outperforming global markets.
Following this rally, the MSCI EM index, according to UBS’ estimates, trades at 14x forward 12-months P/E, 1.6 standard deviations above its 10-year historical average, and at the highest level since September 2021.
The index, however, still trades at a 30 per cent discount to global equities (MSCI ACWI), a discount which is in line with its 10-year average, and at 39 per cent discount to US equities.
Although EM stock valuations are no longer cheap relative to their own history, UBS believes the current levels appear justified by improving momentum, a benign macro environment, and a robust earnings outlook.
“More importantly, the earnings revision momentum has been positive for five consecutive months, coinciding with positive monthly forward returns.
“If sustained, this trend should help support current higher valuation levels for longer, as fundamentals continue to improve,” UBS said.
