Citi upgrades China to overweight and lowers South Korea to neutral

Citigroup has upgraded China to overweight in allocation on light positions and potential benefits from lower oil prices and improving global growth, while it cut South Korea to neutral on a tactical basis given ongoing volatility.

Despite a recent pullback, the MSCI Emerging Markets index rose 20 percent year-to-date, targeting around 12 percent upside to the year-end, Citi said.

If the macro environment remains favorable, including easing geopolitical risks, there is scope for broadening for the emerging markets in the second half of the year, with China and Mexico as potential "broadening" candidates, Citi added.

It upgraded China from neutral to overweight despite relatively weak earnings momentum, saying that positioning remains light and a lower oil and improving global growth environment should be supportive for its expansion.

Citi China economists also expect incremental policies to drive a mild rebound ahead, including a potential 10 basis points rate cut as soon as this July and an acceleration in fiscal policy deployment.

Citi strategist Pierre Lau set the year-end goal of the Hang Seng Index at 29,600 and the first half of 2027 target at 30,500, adding that Citi prefers A- to H-share markets in the second half of the year on higher weighting of A shares from the tech sector and a more supportive liquidity situation.

Besides, Citi downgraded South Korea from overweight to neutral, as it seeks to reduce exposure to the artificial intelligence theme.

South Korea's implied volatility remains elevated, though its memory fundamentals remain robust, Citi added.

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