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Global Strategy Summary for Emerging Markets

Core Themes and Key Insights

The UBS Global Strategy for Emerging Markets (EM) outlines key themes and recommendations for the next 6 months, emphasizing the interplay between trade tensions, monetary policy, and market valuations. The report highlights that while EM accounts for ~80% of the US trade deficit, tariff risk is underpriced, limiting potential market relief. A slowdown in growth across several large EMs is expected, though smaller economies show some positive signs. The US rate environment is seen as a conundrum, with long-end yields likely to stabilize despite potential Fed cuts.

FX Strategy: Strategic Long USD/EM

• Recommended Trades:

  • Long USD vs CNH, CZK & COP
  • Long USDINR via options
  • Long BRLMXN
  • Long THB vs IDR (trail stops to preserve gains)
  • Short USDTRY via put spreads (rotate from EURTRY put spreads)
  • Long ILS vs HUF (NEW)
  • Long Egypt T-bills, FX unhedged (TAKE PROFIT)

• Key Risks:

  • Sharp increase in tariffs, not only on China
  • Rapid weakening in US margins and credit markets

• Key Dates to Watch:

  • Jan: Trump's Inauguration, BoJ meeting, MAS meeting, Brazil fiscal results, FOMC, Samsung earnings
  • Feb: India budget, Brazil elections, Delhi election, South Africa State of the Nation speech, RBI meeting, CBT inflation report
  • Mar: NBH Governor term, China NPC, Brazil fiscal report, BoJ/FOMC meetings, OPEC production cuts
  • Apr: Bol staff forecast, Brazil 2026 Budget Guidelines Law, SARB MPR
  • May: BoJ, Romania presidential elections, FOMC, Philippines election, Brazil fiscal report, Poland presidential elections

Equities Strategy: Selective Exposure

• Preferred Markets:

  • Overweight: China, South Africa, Malaysia
  • Underweight: India, Mexico, Saudi Arabia
  • Neutral: Korea, Brazil

• Key Views:

  • China equities are expected to benefit from domestic stimulus, with limited external spillovers.
  • EM equities are not cheap despite underperformance vs DM, with PE multiples close to their post-Covid peak.
  • EPS growth is expected to be 11% over the next two years, below consensus expectations, driven mainly by tech sectors.
  • Internet and AI-related sectors are highlighted as top picks for China.

Fixed Income Strategy: EM Rates Likely to Outperform

• Recommended Trades:

  • Long EM 5y rates basket (MXN, KRW, INR, ZAR) vs Japan (FX neutral)
  • Receive 1y1y SGD (SORA) OIS
  • Pay PLN 6x9 FRAs (NEW)
  • Long Poland vs Romania Sovereign credit

• Key Markets:

  • CGB-JGB yield convergence is expected, driven by PBC rate cuts and strong demand-supply dynamics.
  • KRW 5y NDIRS is targeted for a 40bp decline to 2.2% in H1, due to slowing growth and easing inflation.
  • India's real yields are attractive, but UBS remains neutral due to potential fiscal deficit widening and limited rate cuts.
  • Indonesia's real yields are attractive, but the report suggests caution due to supply pressures and possible policy restraint.

Regional Analysis

Asia

• China:

  • Growth expected to slow to 4%/3% in 2025/26 vs ~5% in 2024.
  • FX strategy: Long USD/CNH, targeting 7.60 by Q3.
  • Equity strategy: Overweight MSCI China, with target at $69 (7% upside) based on 10.7x P/E and 8% EPS growth.

• India:

  • Growth expected at 6.3% in 2025, below RBI's forecast.
  • FX strategy: INR is expected to underperform Asia peers; recommend short IDR vs THB with trail stops.
  • Equity strategy: Underweight MSCI India due to expensive valuations and weak domestic trends.

• Korea:

  • GDP growth is expected to slow, with BoK likely to cut rates to 2% by year-end.
  • FX strategy: Policy support may stabilize KRW, with target at 9-9.20.
  • Equity strategy: Prefer Korea to Taiwan, with KOSPI target at 2,650 (7% upside).

• Taiwan:

  • Growth is expected to remain above trend at 3.2% in 2025.
  • FX strategy: TWD likely to underperform regional peers; recommend normalizing FX hedge ratios.
  • Equity strategy: Underweight due to expensive valuations; prefer consumer staples and IT services.

• Indonesia:

  • Real GDP growth is expected to remain below potential at 5%.
  • FX strategy: IDR may underperform due to external balance drag and structural growth decline.
  • Equity strategy: Neutral on MSCI Indonesia, with target at 8650 (13.3x 2026E PE).

• Singapore:

  • Growth is expected to slow to 2.6% in 2025.
  • FX strategy: S$NEER is expected to trade lower in 2025, with a shift from exceptional to pedestrian levels.
  • Fixed Income strategy: Front-end rates (1y1y) to decline, while the 2s10s curve to steepen.

Key Charts and Data Points

• Figure 1: UBS EM Risk Appetite index shows little tariff risk priced, on aggregate.
• Figure 2: EM accounts for 80% of the US trade deficit.
• Figure 3: EM earnings growth expectations are higher than Trade War 1.0, but UBS expects higher US tariffs on China.
• Figure 4: EM growth momentum has already declined before potential Trade War 2.0.
• Figure 5: China is exporting its strongest disinflationary impulse in 30 years.
• Figure 6: China's export volumes continue to outperform the rest of the world/EM.
• Figure 7: EM credit growth has not responded much to monetary easing.
• Figure 8: EM credit growth varies by market.
• Figure 9: 10y UST moves 17 weeks after the first Fed cut, indicating an unusual bond selloff.
• Figure 10: EM rates have decoupled from China; any UST stabilization could narrow the gap.
• Figure 11: CNY TWI lost 7% in 2018-19; proposed tariffs are ~3x larger.
• Figure 12: Taiex has been outperforming Asian markets, but valuations are expensive.
• Figure 13: INR REER strength is at odds with weaker growth.
• Figure 14: Equity valuations in India are expensive.
• Figure 15: Indonesia's CA deficit financing is a challenge.
• Figure 16: Weak growth differentials vs. US are a headwind.
• Figure 17: S$NEER is expected to trade lower in 2025.
• Figure 18: Indonesia's real yields are attractive, but supply pressures remain.

Summary of Top Trade Recommendations

• FX: Long USD vs CNH, CZK, COP; Long USDINR via options; Long BRLMXN; Long THB vs IDR; Short USDTRY via put spreads; Long ILS vs HUF; Long Egypt T-bills.
• Fixed Income: Long EM 5y rates basket (MXN, KRW, INR, ZAR) vs Japan; Receive 1y1y SGD OIS; Pay PLN 6x9 FRAs; Long Poland vs Romania Sovereign credit.
• Equities: Overweight China, South Africa, Malaysia; Underweight India, Mexico, Saudi Arabia; Neutral on Korea, Brazil.

Strategic Outlook

The report underscores a cautious yet selective approach to EM investments, emphasizing the need for careful monitoring of trade dynamics, FX movements, and monetary policy. While some markets show potential for growth and value, others are seen as overvalued or vulnerable to external shocks. UBS recommends maintaining a strategic long USD/EM bias, with particular focus on China, South Africa, and Malaysia in equities, and EM rates in fixed income.