Emerging market stocks may not fully reflect the impact of rising U.S. tariffs, say analysts at UBS. Over 35% of revenues in the MSCI Emerging Markets (EM) Index come from exports, with 13% linked directly to the U.S. This makes these markets vulnerable as tariffs increase. Currently, the U.S. tariff rate stands at 16%. There’s a chance it could rise to 21%, a sharp increase from just 2.4% in early 2024 if past levels return. UBS has conducted stress tests that show that rising tariffs plus an economic slowdown could cut EM earnings by 6% to 9%, while recent earnings forecasts have only dropped by 3%.

Tariff Impact On Emerging Market Equities

UBS expects that further revisions will affect the performance of emerging market equities moving forward. UBS analysts have reevaluated how trade risks, particularly tariffs, are priced in emerging market stocks. They analyzed the MSCI Emerging Markets Index, which earns a significant portion of its revenue from global exports—specifically, 13% from the U.S. This indicates that many EM companies could be impacted by U.S. trade policies. Currently, tariffs average 16%, which is high compared to historical rates. If old levels return, tariffs could jump to 21%. This stands in stark contrast to just 2.4% at the start of this year. UBS’s stress tests predict that if tariffs persist alongside a global economic slowdown, earnings could drop by 6% to 9%. This raises concerns, especially since analysts have only adjusted earnings expectations down by about 3% so far.

Market Risk And Derivative Strategies

Looking ahead, there is a gap between what is expected and what might actually happen. This gap is significant. If corporate earnings decrease further, equity valuations could suffer. When prices reflect the real fundamental outlook, we may see heightened volatility across pricing, volumes, and bid-ask spreads—not just in cash equities but also in options and futures linked to these assets. For those focused on derivatives, it’s crucial to note these earnings revisions. They serve as crucial benchmarks for valuation models, whether we’re hedging delta, seeking convexity exposure, or setting up relative value trades. An incomplete downgrade cycle changes the assumptions for future pricing. Here’s our response. We are adjusting our strategies to address the mismatch between revisions and the risks that have already emerged. We’re starting to see early signs of this disconnection in implied volatility levels, which aren’t matching up with equity declines. This often signals a broader risk repricing. Where possible, we are reweighting strategies for factors like skew steepness and recalibrating volatility surfaces, as we don’t believe that spot movements and volatility will act in a linear fashion. A reactive approach would be too passive. There is still too much confidence in emerging market themes, especially in sectors like semiconductors, consumer discretionary, and basic materials, which are directly and indirectly affected by policy changes and trade restrictions. We aren’t predicting a broad decline in equity markets, but mispriced earnings expectations create trading opportunities. We are also focusing more on cross-asset metrics. Credit spreads are beginning to show more strain than equity volatility suggests. This matters. We have seen this pattern before: credit often signals when markets won’t adjust based on just forward price-to-earnings compression. During such times, longer-dated options and attention to barriers can offer asymmetric returns while protecting against unique risks tied to upcoming elections or central bank meetings. In summary, we’re positioning our risk not only based on tariff news but on where consensus earnings settle once reality sets in. We’re not basing future risks on past valuations, which seems to be the underlying error. Create your live VT Markets account and start trading now.

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