Top of the Morning: Emerging Markets - Digesting regime change
Current dynamics in emerging markets are being shaped by a notable shift in the global geoeconomic landscape, in large part stemming from recent discussions at the IMF-World Bank meetings in Washington D.C. Per the full note from UBS, Alejo Zerwanko highlighted that the era of unbridled globalization is fading, and a reorientation of trade policies is at the forefront of the discussions. With U.S. trade policies gaining renewed scrutiny, traders should regard this as a transformative moment impacting multiple economic variables, especially in emerging markets. The desk anticipates fluctuations as these region-specific policies unfold, which are crucial given their historical implications on currency valuations.
What the desk is arguing
The fundamental shift in the global economy revolves around the re-evaluation of trade regimes influenced by recent U.S. policies. Alejo Zerwanko's insights from the IMF-World Bank meetings emphasize a collective ethos among global financial leaders to navigate this new landscape carefully. The consensus suggests that trade policies will increasingly dictate economic trajectories, particularly in emerging markets.
The meetings underscored a possible decline in globalization's previous dominance, sowing uncertainty among investors. This signals potential volatility: as Aylo observed, stakeholders are grasping for clarity amid these changes, especially with the shifting U.S. focus on tariffs and trade agreements.
Where it sits in our coverage
Our consensus target for the emerging markets aligns with a bullish outlook on currencies affected by policy changes, currently pegged at 1.075 with a range between 1.04 and 1.12. Key contributors to this target include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
Given the current trajectory, this analysis sits at the bullish end of the spectrum, highlighting potential strength against a backdrop of flexible fiscal and monetary strategies outlined by various firms.
How other firms see it
Firms like jpmorgan and bofa express differing views on the outlook for emerging market currencies, indicating a split sentiment on the currency potential ahead. The jpmorgan stance is more optimistic, while bofa takes a cautious perspective that implies a limited upside.
Key indicators to watch include trade balance figures and potential policy outcomes from central banks in the U.S. and emerging markets, which will significantly impact currency flows in response to these evolving scenarios.
02U.S. trade policies are pivotal in shaping emerging market currencies.
03Volatility is expected in currency valuations as trade policies shift.
04Global financial leaders are seeking clarity in this new geoeconomic landscape.
Market implications
Traders should closely monitor currency fluctuations around the 1.075 level, as this could be a pivotal point for emerging market currencies amidst shifting policies. Pay attention to U.S. trade announcements for signals that could prompt market repositioning.
Risks to this view
A major reversal in the outlook could occur if U.S. trade policies are perceived as stabilizing or yielding more favorable outcomes for global trade, shifting the risk sentiment back towards a more balanced trading regime. Additionally, any signs of renewed globalization efforts could invalidate current bearish sentiments on emerging market currencies.
ubs
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. Our focus today will be once again on the emerging markets.
I do have joining me here in studio in 1285 today, Alejo Zerwanko, the Chief Investment Officer for Emerging Markets Americas with UBS CIO. Alejo, it's great to be always in person with you. Thank you for dropping by the studio.
I know we have a lot of interesting topics to touch on today, given your recent travel. So looking forward to diving into this with you. Absolutely.
Super excited to be here, Dan. Absolutely. So our conversation, it does coincide.
I want to point this out for our listeners, our clients to the monthly flagship, Investing in Emerging Markets. The title is Digesting Regime Change. This also coincides with, I mentioned some recent travel.
Alejo, you were down in Washington, D.C. for the International Monetary Fund, IMF World Bank meetings. Now, tell us about these meetings. You were boots on the ground.
Many of us, myself included, were not. So very curious to hear about these meetings. Who attends and why are these meetings relevant?
Totally. Dan, the IMF and the World Bank are two multilateral institutions created 70 plus years ago with the U.S. at their core. And twice a year, they invite finance ministers from around the world, central bank presidents from all over the globe to D.C. to discuss the outlook for the global economy.
And what a time to go to D.C. to talk about the outlook for the global economy. This trip inspired the title of the publication. I got the sense that everybody is trying to digest this change in geoeconomic regime.
It is a historic moment, the one we're living. Unabridged globalization seems to be a thing of the past. And we're moving towards something new.
And everybody was trying to figure out what exactly that might look like. So I have to suspect that U.S. trade policies, tariffs were top of mind. This is a very impressive meeting of the minds with global perspective.
So I'm curious, Alejo, what did you hear on U.S. tariffs and outlook there? And how might that compare to our own expectations here at the UBS Chief Investment Office? Absolutely.
I would say most foreigners visiting the United States were very cautious about the outlook for tariffs. They thought things might get worse before they get better. They reminded everybody that there are 232 investigations when it comes to chips, pharmaceuticals and certain commodities, right?
And this might lead to even higher tariffs that we are living with today. Locals had a more nuanced view. Some people were of the expectation that deals with certain countries would be imminent.
Think maybe India or South Korea, Japan, maybe the EU. That maybe deregulation as an agenda topic might be prioritized after that. Tax cuts might be coming.
And putting it all together, you heard somewhat more optimistic views. So I think views were all over the place, a bit more pessimistic from overseas, a bit more nuanced from a domestic standpoint. As you know, Dan, we expect that things are going to be choppy, volatile, tariff-wise, market-wise for the next three to six months, trying to project nine, 12 months out.
We think that the pressure, economic pressure, political pressure, judicial pressure is going to be high enough that tariffs are going to moderate. We're penciling in an effective tariff rate in the 10 to 15 percent ballpark. This is a lot higher than pre-Trump 2.0, but meaningfully lower than we have today.
A topic of interest of our listeners, the future of the US dollar. Will it maintain its status as the global reserve currency? Did that come up in any of the conversations?
Was that discussed? Discussed plenty, Dan. I would say people are concerned about the policy shift that the US is undergoing.
Some of the phrases that were most often utilized to convey the message is, the genie is out of the bottle, the toothpaste is out of the tube. You cannot unsee what you already saw in a way, meaning I think Europe is going to try to prepare for a future that is a bit more independent of the United States, a bit more resilient with a lot more spending in self-defense. China, we already see the reaction in terms of response to tariffs and has no issue with waiting it out while it builds alliances in Asia and with parts of the developing world.
All in, I would say there was a lot of debate about geoeconomic fragmentation, about maybe the US maintaining its sphere of influence in North America and maybe Latin America. Europe at some point agreeing to disagree with Russia while it tries to get ready for a different future ahead in terms of investing in self-reliance. And Asia, with China at its core, also building a new economic structure that is not as reliant on exports to the US.
As I've argued before in this podcast, trade wars are capital flows wars, meaning if goods and services do not trade as freely into the US, that means capital might not go as freely into the US, challenging the US exceptionalism debate. I think in Washington DC, a lot of conversations about foreigners rethinking how much exposure they should have to the United States. Nobody's thinking about a collapse of US assets or a collapse of the US dollar as global reserve currency.
That is not the focus of the conversation. It is what's the right weight. Am I overexposed?
And my sense, Dan, is this is going to be a secular conversation, a multi-quarter, multi-year conversation. This is not going to get resolved in a matter of days. Thank you, Alejo, for the clarity there.
Now, here on the podcast, you've discussed with us many times emerging markets, broadly speaking, China, Latin America. I'm curious as to what the focus points when it comes to those regions are. What are some takeaways you can share with our listeners and clients?
Totally. I've been attending this IMF World Bank meetings for over a decade and sentiment towards emerging markets hasn't been too supportive over this period. Things might be changing, at least sentiment-wise.
People were a bit more constructive vis-a-vis parts of the emerging world. I would highlight the recognition that there are certain countries that fall into the geopolitical swing state or middle power category, meaning large enough, influential enough that they can craft a middle path in between, say, the US, China, Europe. We're thinking about countries like India or some Middle Eastern powers such as the UAE or Saudi Arabia, some Latin American powers such as Brazil.
This set of countries can benefit from this global environment. That's one thing. Latin America was heavily discussed as maybe some sort of safer harbor amid this very challenging backdrop.
We shouldn't forget Latin America received a homogeneous 10% tariff on Liberation Day, April 2nd. Mexico received a 0% additional tariff together with Canada. It's a region that is peaceful.
There's not going to be conflict between countries. Has a decent stock of human capital, of infrastructure that can attract near-shoring, I think, opportunities. It's a developing story.
Unfortunately, Latin America is not proactively jumping at the opportunity to take advantage of it. They could be doing a better job. There are exceptions.
Argentina was heavily discussed in Washington, D.C. in a world in which most people think the outlook is fairly grim. Argentina is reforming its economy for the better and that is catching people's attention among other topics. Alejo, some fascinating takeaways, boots-on-the-ground perspective.
This is, of course, a very important meeting of the mind. Thank you for joining us here on Market Moves to provide this perspective to our listeners and clients. Excellent.
Thank you. Of course, we have a much deeper analysis in our monthly Investing in Emerging Markets, which we titled Digesting Regime Change, and I'm also quite active on LinkedIn with a monthly newsletter and more regular commentary, so listeners are invited to join me on that journey. Thank you for that, Alejo.
I will point our clients specifically to the Investing in Emerging Markets flagship report, as Alejo mentioned, titled for this month, Digesting Regime Change. For our clients of UBS, please reach out to your UBS financial advisor directly if you would like to receive a copy. Alejo, look forward to picking back up with our conversation next month.
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