Citi Upgrades China to Overweight, Tipping It to Lead Next Phase of EM Rally

Citigroup has upgraded its investment stance on China to Overweight, positioning the country to lead the next phase of the emerging markets rally as the bank anticipates a shift away from the narrow, technology-driven gains seen so far this year.

A Broadening Rally

The MSCI EM index has gained approximately 20% year-to-date, but those returns have been highly concentrated, according to a note from Citi strategists led by David Groman. The bank highlighted that AI-linked stocks in Korea and Taiwan have been responsible for the vast majority of the index's performance.

Citi noted that client conversations are "now returning to the likelihood of ‘broadening’ performance" in the second half of 2026. For this to happen, the strategists said it would require signs of broad cyclical improvement in economic data and a sustained pause in the leadership of technology stocks.

China's Case for an Upgrade

Against this backdrop, Citi upgraded China from Neutral to Overweight, identifying it as a prime "broadening candidate." The bank cited several factors supporting its view:

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• Light investor positioning in Chinese equities.
• A favorable macro environment of lower oil prices and improving global growth.
• Expectations for incremental policy support.

While acknowledging that earnings momentum "is still a relative weak spot," Citi's economists anticipate further stimulus, including a potential 10-basis-point rate cut from the central bank and an acceleration in fiscal spending.

Strategic Reallocations

The China upgrade was part of a wider portfolio adjustment. Citi also downgraded Korea to Neutral from Overweight, citing elevated volatility despite remaining constructive on its underlying memory sector. Additionally, the bank moved Mexico to Neutral from Underweight while maintaining its Overweight stance on Taiwan.

Despite the specific country changes, Citi kept its overall Neutral rating on emerging markets within its global allocation. The bank has set a year-end target of 1,870 for the MSCI EM index, representing roughly 12% upside, and introduced a mid-2027 target of 2,050.