Goldman Sachs raises emerging markets target, warns on steel sector

Goldman Sachs raised its 12-month target for the MSCI emerging markets index, citing strong corporate earnings momentum driven by the expansion of artificial intelligence applications, while also noting that any swift resolution to the Iran conflict could ease pressure on currency and bond markets.

The institution raised its target for the benchmark index to 2,000 points from 1,850 points, suggesting a potential upside of nearly 12 percent compared to its last close at 1787.88 points, according to Reuters.

Emerging stock markets have recently seen strong performance, led by North Asian markets linked to artificial intelligence such as South Korea and Taiwan, where the index rose 9 percent in May, outperforming the S&P 500's 5 percent gains.

Goldman Sachs said in a note that this earnings-driven rally could continue, supported by an extended growth cycle in the memory sector, which could further boost corporate earnings expectations in Korea and Taiwan.

It pointed out that the market capitalization of SK Hynix and Samsung Electronics exceeded one trillion dollars each last month, driven by increased demand for high-performance memory chips, leading to a shortage of supply and rising prices.

Goldman Sachs raised its forecast for earnings per share growth within the index to 55 percent this year, compared to 45 percent previously, and expects 20 percent growth in 2027, versus previous estimates of 19 percent.

However, it clarified that excluding North Asia, which accounts for about half of the index's weight, earnings growth is expected to be only 11 percent in 2026 and 2027, reflecting the concentration of gains in the technology and AI sector.

It added that interest rate-sensitive markets, such as South Africa, Brazil, and the UAE, could perform better if risk appetite improves, especially with the prospects of an agreement between the United States and Iran.

In the event of a breakthrough in the Iranian file, Goldman Sachs predicted that currencies such as the South African Rand, Korean Won, Polish Zloty, and Chilean Peso would benefit, along with a potential improvement in local bond markets in emerging economies.

The Organisation for Economic Co-operation and Development (OECD) reported on Thursday that the global steel sector remains in crisis, as China's support for production has led to an abundance of cheap steel in the markets, while the war in the Middle East has negatively impacted demand.

The organization said in its annual report on the sector: "Global steel production capacity has expanded steadily despite shrinking demand; pushing the capacity utilization rate below sustainable levels."

The organization noted that steel is essential for almost all industrial activities, as well as being a vital component in many strategic sectors. It observed that excess production capacity reached 640 million tons last year and is expected to rise to 745 million tons by 2028. This means that excess production capacity represents more than a third of the demand for steel, which reached about 1800 million tons last year.

Meanwhile, the OECD expects demand for steel to rise by only 0.9 percent annually until 2030. The organization, which includes 38 industrial countries, most of them developed industrial nations, noted that most of the surplus steel production comes from China, accounting for 54 percent of the total.

The organization observed that Beijing has nearly doubled the rate of support provided to Chinese steel manufacturers since 2019, reaching 15 times the rate of support provided to steel manufacturers in OECD countries.

With the slowdown of the domestic market in China, Chinese steel manufacturers have intensified their exports. The report stated that "the resulting increase in overproduction is flooding international markets with subsidized and dumped exports."

At the same time, the conflict in the Middle East has led to higher energy costs for energy-intensive industries, disrupting supply chains.

The OECD said: "Coordinated international action is needed to address the structural problems and their impact," noting that a global alliance of steel-producing countries, excluding China, is working to develop a comprehensive framework to address the situation. The organization stated that "Coordinated international action is needed to address the structural problems and their impact," noting that a global alliance of steel-producing countries, excluding China, is working to develop a comprehensive framework to address the situation.

The OECD report indicated that the flow of cheap, dumped steel into markets threatens the financial viability of high-quality producers, despite increasing trade restrictions. The report warned: "If current trends continue, the long-term sustainability of the sector and the national economic security of many countries will be negatively affected."

• Beijing rejects support report

For its part, China's Ministry of Commerce rejected on Thursday a report by the OECD published this week, asserting that its industrial support policies are "fully compliant" with World Trade Organization rules.

The OECD report, based in Paris, released on Monday, stated that government support for industry had reached its highest levels since the global financial crisis, largely driven by China.

China said: "We urge the OECD to conduct research in an objective and neutral manner... and avoid politicizing research reports or exploiting them for political purposes."

Chinese and Hong Kong stocks fell with Asian markets on Thursday, as Middle East tensions escalated, while Chinese chipmaker stocks rose on expectations of domestic breakthroughs. The CSI 300 index of major companies fell 0.6 percent by lunchtime, while the Shanghai Composite index lost 0.4 percent. Hong Kong's Hang Seng index also fell 1.4 percent. Israel and Lebanon agreed to implement a ceasefire to end hostilities, boosting hopes for a broader agreement to end the US-Israeli war on Iran. However, tensions in the region continued, with Tehran launching raids on Kuwait, damaging its airport and injuring dozens, and the US military carrying out strikes near the Strait of Hormuz. Uncertainty led investors to avoid risk, with Asian markets falling 1.5 percent, following a weak overnight performance on Wall Street. Chinese chip manufacturers stood out amid hopes that local companies will overcome US sanctions and export controls. This optimism was boosted by news that DeepSeek, China's most famous AI startup, is preparing to raise about 50 billion yuan ($7.4 billion) in its first funding round from investors including Tencent Holdings and Catl.

Earlier this month, Huawei, a leader in artificial intelligence in China, stated that it is capable of manufacturing industry-leading semiconductors within five years. Tielie Zhang, an analyst at Gavekal Dragonomics, said: "Hopes for AI expansion in China are increasingly tied to progress in domestic chip manufacturing." The STAR Market index for semiconductor materials and equipment jumped 4 percent. The CSI Semiconductor Industry Index rose 2.5 percent. Meanwhile, Chinese coal company stocks rose sharply, driven by expectations that coal mining companies will benefit from a prolonged oil shock. Most sectors declined, led by metals and raw materials stocks.

• Yuan Rises

For its part, the Chinese Yuan rose slightly on Thursday as the dollar index corrected, with traders valuing indicators of the Chinese economy's resilience against unattractive bond yields. Attention is also focused on the US-Israeli war on Iran, as conflicting signals of de-escalation have made traders hesitant. The Peking University School of Economics said in a report: "Despite the ceasefire, the Strait of Hormuz remains largely closed. The stability of the Chinese currency is based on relative stability in the domestic economy and society, but it is under pressure due to changing global interest rate expectations caused by the energy shock from the war." The Chinese Yuan rose in the domestic market by about 0.05 percent to 6.7740 yuan per dollar at 02:50 GMT. The dollar index fell 0.1 percent in Asian morning trading after hitting a nearly two-month high in the previous session. In contrast, China's services sector grew at its fastest pace in three months in May. However, the Chinese economy suffers from uneven growth, with the boom in artificial intelligence and robotics contrasting with the struggles of traditional economic sectors such as real estate.

The People's Bank of China closed liquidity injection channels in open market operations again on Thursday, in a clear attempt to pump excess liquidity into the real economy. The People's Bank of China announced that the volume of seven-day reverse repurchase agreements was zero on Thursday, suspending liquidity injection for the second consecutive day. This halt came amid ample liquidity in the banking system, which pushed money market interest rates down.

This contrasts with the global trend towards tighter monetary policy to curb inflation caused by the energy shock in the Middle East. Based on conflicting factors, the Peking University School of Economics expects the Yuan exchange rate to range between 6.72 and 6.83 yuan per dollar during the current month of June.