Top of the Morning: Resilience tested - Emerging markets navigate the energy shock
The desk underscores the resilience of emerging market bonds amid escalating geopolitical tensions and an energy crisis, diverging sharply from the vulnerabilities observed in emerging market equities. Per the full note from UBS, historical data suggests that investors who remain steadfast during geopolitical shocks often reap rewards, indicating a potential for stability in this sector despite current challenges. The desk notes that the S&P 500 has historically provided positive median returns following such shocks, highlighting a broader context of recovery opportunities. Consequently, the desk may suggest a careful reevaluation of positions within emerging markets, especially as investors navigate the risks and opportunities presented by the ongoing energy crisis and geopolitical landscapes.
What the desk is arguing
The primary argument holds that emerging market bonds demonstrate notable resilience while equities exhibit greater exposure to geopolitical risks and energy price shocks. This divergence prompts investors to reassess their positioning in light of historical patterns that favor enduring exposure to these markets during turbulent periods. The source suggests that staying the course can be ultimately rewarding despite immediate uncertainties.
Supporting this view, recent trends have revealed that despite escalating tensions in regions such as the Middle East and the closure of key routes like the Strait of Hormuz, emerging market bonds remain relatively stable. Historical analysis reinforces this narrative, as past events have shown that the S&P 500 tends to recover in the wake of geopolitical disruptions, thereby justifying a sustained investment approach in emerging markets.
Where it sits in our coverage
The current consensus target for emerging market performance aligns closely with our expectations, placed at 1.075 with a range of 1.04 to 1.12. Notable firms contributing to this outlook include: - jpmorgan: 1.10 for Mar26 - bofa: 1.04 for Mar26
This outlook implies that the desk's positioning could align with the broader consensus, particularly as it hovers near the midpoint of the identified range, suggesting cautious optimism around emerging market bonds while recognizing the fraught environment for equities.
How other firms see it
Firms aligned with this optimistic view include jpmorgan, which anticipates a stable trajectory for emerging market assets, while bofa represents a contrary stance, forecasting more pronounced vulnerabilities given the current geopolitical landscape. The ongoing energy volatility mirrors broader trends leading into potential shifts in currency pairs, particularly USD/BRL and USD/INR, which are sensitive to both global energy prices and geopolitical developments.
What the calendar says
As there are no high-impact economic events scheduled in the next 30 days that could influence these dynamics, traders should remain alert to any emergent geopolitical developments or statements from central banks that might affect emerging market sentiment more broadly.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Emerging market bonds are resilient despite geopolitical tensions.
- 02Equities face greater exposure to energy crises and geopolitical risks.
- 03Historical data supports the notion of rewarding steadfastness in turbulent times.
- 04Investors should consider reevaluating positions given current risks.
Market implications
Traders should watch for any geopolitical developments that may indicate a shift in market sentiment, particularly those impacting energy prices. A sustained interest in emerging market bonds may manifest as a price stability above 1.075, suggesting cautious positioning could yield returns over the coming months.
Risks to this view
Increased volatility in energy prices or a significant escalation in geopolitical tensions could jeopardize the current resilience of emerging market bonds, leading to broader sell-offs in the sector. Should these pressures lead to a systematic downturn, it could force a reevaluation of existing positions amid shifting market dynamics.
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. For today, we are going to revisit our ongoing conversation on the emerging markets.
That means joining me here once again in studio. Glad to welcome back Alejo Zerwanko, the Chief Investment Officer for Emerging Markets Americas with the UBS Chief Investment Office. Alejo, thank you for dropping by.
Always great to do these in person. So nice to be at the mics with you today. So happy to be here.
Thank you for having me, Dan. And you're joining us today, Alejo, because I know as we're speaking today, the latest investing in emerging markets, a monthly publication is now available for our listeners, our clients up on UBS.com slash CIO. The title for the April edition, Resilience Tested, Emerging Markets Navigate the Energy Shock.
So we'll spend some time diving into that. Also congratulations are in order because I know your team, the Chief Investment Office team here at UBS, has been recognized by Euromoney, having been awarded the 2026 Euromoney Private Banking Award for Chief Investment Office teams in Latin America. So congratulations to you, the entire team, well-deserved and wanted to throw that out there at the start.
Thank you. Very excited about that as well. So let's dive right into our conversation today, Alejo, because I know history shows investors have often been rewarded for staying the course during geopolitical shocks.
Of course, we've been monitoring the ongoing developments in the Middle East. But with the current energy crisis and the Strait of Hormuz effectively closed as we're recording today, Alejo, do you think this time is different? Perhaps what signal should investors watch for to know if resilience is starting to crack?
You're spot on, Dan. We've done the work. And if you look at history, you're typically better off fading major geopolitical shocks.
Let me give you a few numbers. The S&P 500 delivered median positive returns of 10% the year following major geopolitical shocks since 1940. Positive returns took place nearly 80% of the time.
So history is any guide. Geopolitics might impact markets in the very near term, doesn't do so medium to longer term. Now, we got to contemplate the possibility that this time might be a little different.
After all, the International Energy Agency is describing the current energy crisis as the worst in history. So I think the likelihood this particular shock has a lasting mark on asset prices is going up. The way I see it, the global economy is being held in a chokehold.
Vital oxygen is being cut off. The good news is the world entered this crisis in relatively good health, solid economic growth, manageable inflation, robust corporate fundamentals. Yet, as you know, even the fittest will eventually suffer lasting damage if they cannot breathe.
The way to analyze this crisis is to maybe identify key transmission channels. And I think there's two primarily, energy prices and financial conditions. And they are interrelated.
If you consider the fact that high energy prices are increasing, the likelihood that central banks are forced to respond with interest rate hikes because of the expectation of higher inflation, you can see how both energy and financial conditions are tightly related. Consider this, the market repricing has been so aggressive in recent days that central banks in Europe, in the UK, in Switzerland, in Japan, are all discounted to hike interest rates in the next 12 months quite aggressively. And the Fed right now, according to market pricing, is discounted to stay put in the next 12 months.
So there's a lot going on. History indicates that you should stay put. The more that we are at the margin, the longer this crisis goes on for, they're risking a little bit portfolios too.
Be mindful and open to the possibility of this time being a little different. Well, very helpful context to set the stage. Just looking at how asset prices have been responding now, emerging market bonds, they have held up well despite the turmoil.
However, equities have been more exposed. What factors, Alejo, are driving this divergence and how should investors think about positioning in emerging markets given the current risks and opportunities? Let's start with emerging market bonds, indeed, very resilient.
If you track the spread over U.S. treasuries that these bonds offer, they are only marginally wider since the war began over three weeks ago. We think this resilience is justified and can be sustained. Consider the robust emerging market fundamentals, including lower fiscal deficits, fairly strong monetary policy frameworks, high international reserve positions, pretty good current account balances and anchored inflation expectations.
In addition, in the emerging market bonds world, Latin America has a pretty large weight of roughly 35% and this region is detached from conflict and includes net energy exporters such as Brazil, Argentina, Colombia, Venezuela. Now the equity space, Dan, has been more exposed without a doubt. Emerging market equities are down more than 10% in U.S. dollar terms from their peak.
This has been driven mainly by profit-taking in some trades such as the tech trade and the much more significant exposure to energy imports from Asia, and Asia is the lion's share of the emerging market equity universe. Now on a forward-looking basis, Dan, if this trade, of course it's trade for moves, begins to reopen in weeks rather than months, we think attractive yields in emerging market bonds should help deliver high single-digit returns through the end of the year, well above cash, and therefore we maintain an attractive recommendation on emerging market bonds. On the equity space, we expect low to mid-teens upside by December, this supported by continued earnings growth, some degree of multiple re-rating, but at the same time we think some degree of taking risk off the table is in order in the equity space.
We have, for instance, downgraded Indian equities to neutral considering the country's very high dependence on imported energy, roughly 90% of Indian energy is imported, 40% comes from this trade for moves, so very exposed right there. And by and large, Dan, I would say we do expect resilience in the asset class, but this has limits. The longer this conflict goes on for, the higher the energy prices, the tighter financial conditions are globally, at some point, you know, emerging market fundamentals will start to suffer.
You've alluded to this a bit already, Alejo, from a regional standpoint within emerging markets, LATAM, Latin America, stands out as a relative safe haven. Tell us a bit more about the prospects for the region. Hard to believe that you would call Latin America a, quote-unquote, safe haven, but I think to some degree that's what we're seeing today.
The region is geographically detached from most geopolitical fault lines, and with a global focus on security, people are really looking at the energy security, food security, technological security, financial security side of the spectrum. Latin America offers at least partial answers to the security anxieties. Do you want oil?
There's plenty of it. Do you want food? You know, a major global supplier.
Are you interested in technological security through lithium, copper, rare earths, plenty of stocks of these critical minerals in Latin America, and even some gold when it comes to financial security. So I think the region is commanding increased global investor and policymaker attention for good reasons, and in addition, you've got domestic policy improving at the margin. If you think about leaders in Latin America, we're getting a new crop of market-friendly figures represented by the cases of Chile, Argentina, Bolivia, Paraguay, Ecuador, El Salvador, among others, and crucially, there are elections around the corner in Peru, in Colombia, and later in the year in Brazil.
We might see a further reinforcement of center-right, market-friendly policies in the region. These are leaders that might be better able to take advantage of this global interest. So I think Latin America will continue to attract interest and attention.
Market-class performance has been very good in 2025, and even so far in 2026, war included. We think this pattern is extrapolatable, meaning you should expect good performance from here onwards as well. Now, Alejo, in this context, again, I want to highlight that your team recently received an important recognition as the best chief investment office team in Latin America, that according to the 2026 Euro Money Private Banking Award.
So once again, congratulations. What does this award mean? We're super happy, Dan, and I think it's simply a recognition of the focus and energy that we put on studying, analyzing, understanding emerging markets at large, and in this case, Latin America specifically.
Just last year, 2025, over 300 reports focusing on emerging markets in Latin America, over 70 podcasts with you and in Spanish, in Portuguese, in the LATAM Access channel that we also maintain. So we want to be at the center of the investor conversation when it comes to emerging markets in Latin America, and every day we come in focused on that. When it comes to this specific region, we are on top of developments in Brazil, Mexico, Chile, Colombia, Peru, Argentina, Venezuela, the Dominican Republic, Panama.
We have official coverage of all these countries, and I think the award is simply a recognition of these efforts. Welp, I've had the pleasure of working with you and several members of the team over the years. You all do impactful work and do want to highlight the LATAM Access podcast channels in Portuguese and Spanish, both available on Apple Podcasts and Spotify.
So for those who are interested, definitely recommend giving them a listen. Alejo, thank you for joining us again. I want to highlight the report Alejo has been citing today, the Monthly Investing in Emerging Markets publication series, the title for the month of April, Resilience Tested, Emerging Markets Navigate the Energy Shock, is available now up on UBS.com slash CIO for clients of UBS.
Please be sure to reach out to your UBS financial advisor if you would like to receive a copy of the publication directly. Alejo, thank you again, and we look forward to picking back up with our emerging markets conversation next month. Great to be here.
Thank you, Dan. Absolutely. For more information about the UBS Chief Investment Office within UBS Global Wealth Management, visit UBS.com slash CIO to view the latest research.
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