Emerging market equities might not fully account for the rising U.S. tariffs, according to UBS analysts. With over 35% of MSCI EM revenues deriving from exports and 13% connected to the U.S., these markets are at risk as reciprocal tariffs are implemented.<\/p>\n
The current U.S. tariff rate stands at 16%, with the potential to rise to 21%, a sharp increase from 2.4% in 2024 if past tariff levels return. UBS stress tests indicate that tariffs and an economic slowdown could reduce EM earnings by 6\u20139%, while recent earnings forecasts have only decreased by 3%.<\/p>\n
UBS anticipates that further downgrades are likely to impact emerging market equity performances in the future.<\/p>\n
So far, what we\u2019ve seen from UBS analysts is a clear reassessment of how much trade-related risks\u2014specifically tariffs\u2014are actually priced into emerging market stocks. They took the MSCI Emerging Markets Index as a starting point, which draws a hefty portion of its revenues from global exports. A measurable chunk, 13%, flows directly from U.S. exposure. This tells us that many EM companies are vulnerable to any trade action coming out of Washington.<\/p>\n
Right now, tariffs average around 16%, which is already elevated by historical standards. If previous levels make a return\u2014which seems more likely than not\u2014these could jump towards 21%. Compare that to the low base of 2.4% at the beginning of this year, and the potential headwind becomes quite clear. UBS ran various stress tests to simulate outcomes under different scenarios. These suggest that if higher tariffs stick alongside a broader global slowdown, then we could easily be looking at earnings dragged down by 6% to 9%. That becomes more pressing when we remember that analysts have only pared back expectations by around 3% so far.<\/p>\n
Looking ahead, what this points to is a gap between expectations and likely outcomes. That gap is important. If corporate earnings slip further, then equity valuations may not hold. And when prices ultimately reflect the fundamental outlook, we often see volatility across pricing, volumes, and bid-ask spreads\u2014not just in cash equities but increasingly in options and futures tied to those underlying assets.<\/p>\n
Now, for those of us focused on derivative markets, this isn\u2019t just a footnote. These earnings revisions serve as anchors for valuation models\u2014whether we\u2019re hedging delta, looking for convexity exposure, or setting up relative value trades. A downgrade cycle that has not yet completed alters the underlying assumptions for any forward-dated pricing.<\/p>\n
So here\u2019s what we\u2019re doing. We’re adjusting our positioning to recognise the mismatch in revisions versus risks already materialising. We\u2019re already seeing the early signs in implied volatility levels, which aren’t aligning neatly with equity drawdowns. This disconnect often unfolds just before broader risk reprices. Where we can, we’re reweighting for items like skew steepness and recalibrating vol surfaces\u2014instead of assuming that spot movement and volatility will continue to behave in linear fashion.<\/p>\n
A reactive approach here would be too passive. There\u2019s still too much assumed resilience in EM-linked themes. Especially when looking at industries like semiconductors, consumer discretionary, or basic materials\u2014sectors with direct and indirect sensitivity to policy tightening and trade curbs. We\u2019re not predicting broadly weaker equity markets, but that isn\u2019t even the point. Pricing inefficiencies at the edges\u2014based on misaligned earnings expectations\u2014give us the trading gaps to lean into.<\/p>\n
We\u2019re also leaning more on cross-asset metrics. Credit spreads are beginning to reflect more strain than equity volatility currently suggests. That divergence matters. We’ve seen this pattern before: credit often leads when markets won\u2019t reprice on forward PE compression alone. In those moments, longer-dated option structures with attention to barriers can offer asymmetric returns, as well as cover for idiosyncratic tail risks developing in upcoming election cycles or central bank meetings.<\/p>\n
In short, we\u2019re setting up our risk not based just on where tariff-related headlines go, but where consensus earnings land once reality catches up. We’re not pricing tomorrow\u2019s risks based on yesterday\u2019s valuations, and that\u2014more than anything\u2014seems to be the error.<\/p>\n
Create your live VT Markets account<\/a>\u00a0and\u00a0start trading<\/a>\u00a0now. <\/b><\/p>\n","protected":false},"excerpt":{"rendered":" Emerging market equities risk underperformance as rising U.S. tariffs and economic slowdown pressure earnings forecasts.<\/p>\n","protected":false},"author":62,"featured_media":17026,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[],"class_list":["post-26091","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-live-updates"],"acf":{"acf_article_selection_author":null},"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/posts\/26091","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/users\/62"}],"replies":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/comments?post=26091"}],"version-history":[{"count":0,"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/posts\/26091\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/media\/17026"}],"wp:attachment":[{"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/media?parent=26091"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/categories?post=26091"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-asia\/wp-json\/wp\/v2\/tags?post=26091"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}