Emerging market equities

24 August 2026, 18:06 UTC Chief Investment Office GWM Investment Research

Navigating yield uncertainty Emerging market equities Authors: Laura Smith, Analyst, UBS Switzerland AG; Xingchen Yu, Emerging Markets Strategist, CIO Americas, UBS Financial Services Inc. (UBS FS); Alejo Czerwonko, Chief Investment Officer Emerging Markets, UBS Financial Services Inc. (UBS FS); Maximilian Kunkel, Strategist, UBS Switzerland AG; Pietro Santin, CIO Emerging Market Strategist, UBS Switzerland AG

• We remain constructive on EM equities and maintain our June 2027 MSCI EM Index target of 1,920. Our view is supported by solid earnings momentum, a resilient macro backcrop, continued AI-related demand, and improving market breadth. The pullback in recent weeks has also improved the opportunity set across EM equities.

• Higher interest rates in the developed world have returned to the center of the market debate. Higher yields are not automatically negative for EM equities. The impact depends on why yields are rising, how quickly they are moving and the potential impact on earnings expectations, and the US dollar.

• EM is not immune to yield volatility, but structural higher earnings growth, deeper domestic capital Source: UBS, Getty Images markets, improved fiscal frameworks, and a changed index composition make the asset class more resilient to US yields and external financing conditions than in the past.

• Earnings strength remains the key buffer. Structural technology growth, broadening earnings momentum, and fair valuations should help EM equities absorb an orderly rise in yields.

Yields are back in focus The US 10-year yield has risen by around 11 basis points over US yields have returned to the center of the market the past month, equivalent to approximately 0.4 standard debate, adding to volatility across global and emerging- deviations of historical one-month yield changes over the market equities. For EM equities, the key question is not past 10 years, making it still a relatively moderate move. simply whether US yields rise, but why they rise and how The risk would increase if the move accelerated, the dollar the move interacts with the dollar. A gradual increase in strengthened further, or earnings expectations weakened. nominal yields driven by resilient growth is manageable if earnings expectations remain firm. The more difficult Markets are currently pricing almost two additional Fed scenario would be a sharp rise in real yields accompanied hikes over the next 12 months. If economic data soften, by dollar appreciation, tighter global liquidity, and weaker these expectations could be unwound, helping to cap dollar earnings expectations. strength and support EM assets. A renewed Fed-tightening scenario could nevertheless trigger a temporary pullback in EM equities. The impact would likely be more limited if

This report has been prepared by UBS Switzerland AG, UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosures at the end of the document.

earnings momentum remained resilient and the dollar did while domestic pools of capital and local-currency debt not strengthen materially. markets have become more important in several emerging economies. In addition, greater fiscal and policy prudence in Figure 1 - EM equities' sensitivity to nominal and parts of EM may have reduced external imbalances and the real yields, inflation expectations, and the USD risk of broader financial contagion (see Navigating cyclicality Rolling 26-week correlations between MSCI EM and US nominal and structural growth changes, 29 April 2026). yields, real yields, breakevens, and DXY Figure 3 - EM returns depend on the dollar and real yields Average monthly concurrent MSCI EM return across dollar/real-yield regimes; observations from the full sample, last 10 years

Source: LSEG Datastream, UBS, as of August 2026 Source: LSEG Datastream, UBS, as of August 2026 Total observations: 121; Rising TIPS/Rising Dollar: 39, Rising TIPS/Falling Dollar: 25, Falling TIPS/Rising Dollar: 20, Falling TIPS/Falling Dollar: 37

The dollar matters more than yields alone These changes do not make EM immune to higher yields. A In our analysis, EM equities have…