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Roula Khalaf, Editor of the FT, curates her top stories in this weekly newsletter.
The writer is head of emerging markets cross-asset strategy at UBS
American exceptionalism continues to impact global markets, with US equities outperforming by 20% last year. Despite this, one key indicator, the trade balance, remains weak. This weakness is likely to lead to new tariffs focused on China. However, the effects of these tariffs are expected to be felt more in other emerging markets for several reasons.
Firstly, China’s export prices have significantly decreased, leading to a surge in exports to other emerging markets. This surge is not just a redirection of Chinese products meant for the US but also reflects China’s advancement in the manufacturing value chain and the export of excess capacity.
Secondly, the potential new tariffs may further slow down Chinese imports, affecting commodity exporters as well. This could put pressure on fiscal resources and profitability, impacting emerging markets that rely on exports to China.
Thirdly, with growth slowing in many developing economies, the threat of a new trade war poses challenges. Emerging markets are struggling with limited investment and flat export growth, making them vulnerable to the impact of tariffs.
Fourthly, industries like autos, steel, and electrical equipment in emerging markets are more sensitive to tariffs compared to developed economies. This vulnerability could lead to market disruptions in these regions.
Lastly, emerging markets face uncertain trade negotiations with the US, especially as deficits with countries other than China are on the rise.
While some investors believe that market valuations already account for these risks, UBS disagrees. The Emerging Markets Risk Appetite Index suggests a strong outlook for earnings growth in emerging markets, but the cost of protection against currency depreciation remains low.
Overall, high real rates and disinflation present opportunities in fixed income investments, while growth-sensitive assets like equities and currencies may face challenges in emerging markets.