UBS: Tariff risks not fully reflected, emerging markets could further decline.

UBS Group indicated that due to recent sell-offs not fully reflecting the risks of potential tariffs imposed by Trump, emerging market stocks and currencies are at risk of further decline. UBS Emerging Markets Cross-Asset Strategist Manik Narain stated in a report that the UBS Emerging Markets Risk Appetite Index is between neutral and optimistic - given the global growth situation, the index is unusually strong. He added that profit expectations, currency hedging costs, and credit default swaps suggest that the market is still pricing risk at historically low levels. With less than a week before Trump's inauguration, his promise to increase import tariffs on trade partners has sparked concerns in global markets. This worry, along with concerns of inflation resurgence, has led to emerging market stocks losing $1.3 trillion and 27 out of 31 of the most widely traded currencies dropping since Trump's victory in November. Manik Narain said, "Some investors believe that valuations have already priced in these risks after recent underperformance. We do not believe that is the case. We think larger market volatility is unfolding in emerging markets." Manik Narain also mentioned that the slowdown in growth of emerging economies puts them at a disadvantage in dealing with potential trade wars. Despite flat stock returns, emerging market stocks in tariff-sensitive industries like automobiles, steel, and infrastructure are still expensive outside of China. He also stated that tariffs could harm countries outside of China.