Emerging markets are currently facing vulnerabilities due to the potential tariffs proposed by the incoming Trump administration.
The recent selloff in these markets does not fully account for the risks associated with the proposed trade policies. The UBS Emerging Markets Risk Appetite Index suggests a strong sentiment, which is unusual given the prevailing conditions of global economic growth. However, there is historically low market pricing for risks, as indicated by earnings estimates, currency-hedging costs, and credit default swaps.
The commitment of Donald Trump to increase import tariffs on countries like China has already led to a significant loss in emerging market equity values. The uncertainty surrounding these tariffs, along with concerns over rising inflation, has had a widespread impact on global markets. The most significant market movements are expected to occur outside of China, despite its competitive yuan. While the tariffs may stimulate exports, they could also lead to a slowdown in imports, which poses a threat to emerging market commodity exporters.
Sectors such as autos, steel, and infrastructure, which are sensitive to tariffs, are facing challenges with high valuations and stagnant returns on equity. Countries like Mexico, Vietnam, Taiwan, Korea, and Thailand, which have significant trade surpluses with the US, are also at risk.
The potential tariffs will likely have far-reaching effects on the global economy, impacting a wide array of economies that rely on trade with the US. The implications of these potential tariffs will continue to unfold and shape the trajectory of emerging markets in the coming months. The interplay between US trade policy and global economic dynamics will be critical in determining how these markets respond to the challenges ahead.