Investing.com -- Citi strategists have shifted their outlook on several emerging markets, upgrading Brazil and South Korea to Neutral while downgrading Mexico and Saudi Arabia to Underweight.

The changes come amid a volatile macro backdrop marked by ongoing tariff uncertainty and persistent earnings revisions across emerging market (EM) equities.

“We upgrade Brazil and Korea to Neutral, both of which are still pricing relatively bearish earnings per share (EPS) outcomes, according to our models,” Citi strategists said in a Friday note.

At the same time, the bank cut its rating on Taiwan to Neutral due to weak EPS revisions, and downgraded Mexico and Saudi Arabia to Underweight.

The move to upgrade Brazil and Korea follows improvements in earnings momentum and valuation support. For Korea, despite high exposure to global trade risks, Citi noted that the market appears attractively priced, with much of the downside already reflected.

In Brazil, Citi sees improving earnings revision trends and relative insulation from tariff-related shocks.

Mexico and Saudi Arabia, in contrast, face mounting headwinds. Citi highlighted that Mexico remains “highly exposed to tariffs and U.S. slowdown, with little upside in strategist targets,” while Saudi Arabia faces “expected headwinds from a weaker USD and oil prices.”

The broader EM backdrop remains fragile, with Citi maintaining an Underweight stance on the asset class globally. The firm sees about 5% upside in the MSCI EM Index to year-end, targeting 1,170.

However, risks are tilted to the downside, particularly given the lingering impact of U.S. tariffs. “We have previously estimated that U.S. tariffs could directly reduce MSCI EM EPS growth by 5-6pp this year,” the report stated.

Citi’s allocation model continues to favor select cyclical and defensive plays, maintaining Overweights on India, South Africa, and Chile.

Despite a recent rebound in EM equities, Citi remains cautious. “EM equities have recently stabilized with the Trump Administration showing signs of moderation on trade. But the tariff overhang remains in place, and earnings estimates continue to reset lower,” the strategists noted.