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This UBS Global Strategy report examines Emerging Market (EM) trends in light of escalating tariff risks, economic slowdown concerns, and currency shifts. UBS highlights that EM is facing significant challenges from broader and higher tariffs than anticipated, leading to a sharp decline in risk appetite, with the EM risk appetite index near record lows. A key question is whether EM currency capitulation is approaching, given the consensus move away from US dollar strength in favor of risk-off positioning.

EM growth risks are deemed unusually high, with a synchronized global slowdown potential outweighing reciprocal tariff effects. This scenario could pressure EM earnings and credit valuations. UBS sees value emerging in local debt (currency neutral), with recommendations focusing on specific countries like Brazil, Mexico, India, and Korea due to attractive yields. For currencies, tactical shorts are favored in vulnerable markets such as THB, INR, IDR, and SGD against developed market currencies, while long positions are suggested in TRY and BRL amid elevated carry and central bank caution.

Regarding valuations, UBS assesses MSCI EM levels around support zones, with clearer risk-reward improving for EM credit and equities like MSCI China, Poland, and Greece, contingent on orderly repricing. EM assets may benefit from ongoing tariffs, but the analysis underscores the need for careful consideration of factors like Chinese policies and central bank actions to refine strategic positions.

Overall, while EM sentiment is bearish, the market is repricing faster than previously, offering tactical opportunities, but long-term risks remain high due to interconnected global slowdown dynamics.