Top of the Morning: Emerging Markets - Where luck meets skill

Hi, everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.

For today, we will continue with our ongoing series of conversations as it relates to the emerging markets. We will spend some time today providing some highlights and takeaways from the CIO Emerging Markets flagship publication series. The latest edition is titled Where Luck Meets Skill.

And joining us for the conversation today, glad to welcome back from the UBS Chief Investment Office, Senior Emerging Markets Strategist Alberto Rojas. So with that, Alberto, thank you very much for dropping by today, spending some time with our listeners and their clients. Nice to have you back with us.

Oh, it's a total pleasure, Dan. Thank you so much for the opportunity. So let me talk to you a little bit about how we're seeing emerging markets.

Let me give you first the global picture. In our global year ahead report, it's called Escape Velocity. And in it, we argue that the powerful combination of AI-driven innovation and a loose monetary policy should outweigh the negative gravitational forces of elevated global debt, persistent inflation challenges, certain geopolitical uncertainty.

So we think that the positive impacts should help propel the global economy into further growth and keep on supporting the market. So again, our baseline scenario anticipates that the Fed will cut some more, that we're going to have a soft U.S. dollar going forward, and there is a constructive outlook on commodities. So when I say those factors, I just want to remind to the audience that this is a constellation that is favorable for emerging markets.

So that's what we like to refer to as the luck part. It is lucky that emerging markets are going into 2026 in a situation in which we have a loosening Fed, a soft U.S. dollar, and a constructive outlook for commodities. But there's also a side of skill, you know, a skill from Latin American, from Asian, from emerging market authorities everywhere that have followed through with what should be done in terms of policy.

And, you know, they have been appropriate in terms of their monetary policy, appropriate in terms of their fiscal policy. And for 2026, we believe it's not just luck, but that part of skill, of doing things appropriately, should lead to constructive domestic fundamentals. We expect that in emerging markets, GDP growth will remain resilient, that inflation will be contained, and that central banks in certain countries will actually have space to loosen their monetary stance, which should provide, you know, a boost for markets.

You know, I think it's something we have learned, you know, after covering the emerging market region for quite a long time is emerging markets and its authorities have learned from past mistakes. And nowadays, central bank independence, fiscal responsibility, and appropriate balance of payment dynamics are basically what takes place in the in the sovereigns, which provides them with sound macroeconomic stability. And we think that gives them a very nice situation to face 2026, in which global conditions are beneficial for emerging markets.

Okay, so with that macro backdrop in mind, Alberto, and thank you for tying in the meaning of the title of this month's publication into that macro backdrop. Let's now spend a few moments on positioning. I know there's a few areas we want to hit on with our listeners and clients.

Let's begin with CIO's current thinking when it comes to emerging market equities. Of course. So, you know, in short, we rate emerging market equities as attractive in our global equity strategy.

We think that in this situation, you know, luck meets skill, things are going fine. Earnings growth should accelerate. We expect MSSE IEM earnings to rise 11% in 2025, closing this year, and 16% in 2026.

This is driven by AI adoption and higher commodity prices that help companies in the region. We also want to highlight to our audience that we are optimistic in emerging market equities, not only because of the macro, but also because we see that they trade at notable discount relative to global peers. So positioning remains conservative, which leaves room for investors to have an allocation there and take advantage when markets reassess.

So our preferred emerging market equity allocations are China Tech, China, India, Brazil, and Indonesia. And, you know, that's sort of how we're seeing it on the equity side, Dan. Okay, Alberto.

So now that we have an understanding of CIO's preferences when it comes to emerging market equities, let's now turn over to fixed income. What does CIO prefer there? Sure.

So on the E-M fixed income side, what I want the audience to take into account is that E-M fixed income spreads are very tight relative to historical levels. They're very tight relative to U.S. treasuries. What does this mean?

This means that this is not a context in which there is a lot of space for yield compression. The yield compression is not the name of the game over the coming months. Rather, what is relevant is to be able to clip coupons, to get good carry.

So we recommend investors to look for sound sovereigns and sound corporates that, you know, have good metrics, but at the same time that provide a decent spread. You can't go high yielder, but there is an opportunity to find interesting spreads in emerging markets that provide, you know, a good return with reasonable risk. And let me take advantage and go a little bit for currencies and comment that, you know, both cyclical and structural factors suggest that the U.S. dollar should soften a little further in the months ahead.

So in that situation and taking into account that emerging markets are places where local rates are higher, we continue to favor long positions in high yield carry currencies, places where you can get some good return on the currency side. In emerging markets, some of our favorites include Brazilian real, Mexican peso, Indian rupee, and the South African rand. Okay, so quite a few considerations when it comes to positioning, again, to take an inventory.

Alberto, you covered with us equities, fixed income, and ended there with currencies. Do want to spend a few moments focusing on Latin America. A lot happening within the region.

Are there any stories in particular, Alberto, across Latin America that you would want our listeners and our clients to be mindful of? Of course, Dan, thank you. Well, look, I think there are some key aspects taking place on the region over the coming quarters.

In the case of Mexico, 2026 will be the year in which the USMCA trade agreement will be renegotiated. So it is possible that we see, you know, every now and then a bit of headlines on the subject. But we want to be clear.

We think that the commercial union between the United States and Mexico will remain solid. And even though, you know, we'll make a jury from time to time, the reality is that this trade agreement we expected to hold for negotiation should take place. And the relationship between Mexico and the US is likely to continue in our view.

Another thing that will be relevant in the region is that we will have several elections in different countries. We have elections next year in Brazil. We have elections on Peru.

We have elections on Colombia. By the way, we recently just had an election on Chile. And what we want clients to take into account is that, yes, it seems a pattern happening globally, that more pro-business administrations are gaining political support.

And that does seem to be the way that people are envisioning Latin America next year. The chance is that more business-friendly leaders come into place in several countries. But what we want to remind investors is it is not just about the leader.

It is about governability. It's about the ability of the incoming leaders to have support in the legislative branch. So their plans whatever structural reforms they want to accomplish can actually get done.

Without governability, it is very difficult to accomplish change. So we won't just be looking at what happens on presidential elections, we'll be looking at what happens with Congress as well. And, you know, a lot to talk about in a lot of time, but I'll stop there, Dan.

Yeah, a lot of notable developments to be mindful of. And that, of course, lends itself to some follow-up conversations that I look forward to having with you and the team in the weeks and months ahead, though. Alberto, thank you very much again for dropping by today, keeping our listeners, our clients informed on CIOs thinking when it comes to the emerging markets and how to be positioned across the asset class.

A pleasure, Dan. And again, today we have been joined by Alberto Rojas, Senior Emerging Markets Strategist for the Americas with the UBS Chief Investment Office. Again, I want to highlight the publication which Alberto has been making reference to on today's episode, that being the Investing in Emerging Markets flagship report from the UBS Chief Investment Office.

The title of the publication for this month, again, Where Luck Meets Skill. The publication is available for you now up on ubs.com forward slash CIO. Though for clients of UBS, please reach out to your UBS financial advisor if you would like to receive a copy of the publication directly.

From UBS Studios, I'm Dan Cassidy. Thank you for joining us. Thank you for tuning in.

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