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Current trade war through an EM lens · UBS Trending

• 0:00
  When the
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  United States runs a trade deficit, its spending more abroad
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  than it earns.
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  For decades.
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  The rest of the world has financed
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  this imbalance by purchasing American assets.
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  But on April 2nd, everything changed, with U.S.
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  tariffs surging from 2.5% to 25%.
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  Global trade and investment flows face a historic
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  restructuring through an emerging markets lens.
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  How are these times affecting places around the world?
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  We're going to break it all down for you right here on UBS.
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  Trending.
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  Hi, everyone, and thank you so much for joining us.
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  I'm Anthony Pastore
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  and this is UBS Trending in the hot seat today is Chief
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  Investment Officer of Emerging Markets here in the CIO
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  Alejo Czerwonko I'd like to thank you.
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  I know you've been busily digesting as much of the news flow
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  as you could, especially since the tariffs
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  announcement was instituted on April 2nd,
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  which we all anticipate.
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  And as we said in the intro
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  today, we're looking at it from an emerging markets lens.
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  And I think
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  probably one of the things that I would ask
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  you is explaining a trade war
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  and really what it looks like through
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  an emerging markets lens, because we've talked about Europe,
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  we talk about Canada,
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  but there's lots of China, Mexico, India, a lot of countries,
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  Asian countries that are very much
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  going to be impacted potentially by the tariffs here in the US.
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  Absolutely. You said it.
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  We anticipated Liberation Day.
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  Nobody expected this size of announcement.
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  It's gigantic.
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  We're talking about effective US tariff rates
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  in the 25% realm, which is not seen in 100 years.
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  So this is a big deal.
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  If it sticks, we will see
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  deep changes to the way goods flow across borders,
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  deep changes to the way capital flows across borders.
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  There are two sides of the same coin.
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  If the US runs a trade deficit,
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  this means the country is buying a lot more goods from abroad
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  than it's selling abroad.
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  In other words, like any family corporation
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  that is living beyond its means, it needs financing.
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  It needs people to plug that gap.
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  For decades, foreigners were happy to provide
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  that financing in the shape of buying US assets.
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  U.S. stocks, U.S.
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  bonds.
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  Now, if the United States wants to eliminate this trade deficit,
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  then capital might not flow as freely across borders.
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  That's another implication.
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  Yeah, which impacts everyone literally around the globe, us
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  and our trade partners,
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  whether they be developed or in this case, emerging.
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  But we can't really not focus on Asia
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  because Asian countries seem to have really bear
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  the brunt of these sweeping tariffs.
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  And by huge numbers, we know that the effective rate
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  for China is something like 54%.
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  But, you know, and interestingly, I saw an article talking about
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  how China is getting together with North, South Korea and Japan
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  to figure out a coordinated tariff response.
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  So clearly they are planning on saying something
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  or coming up with some plan or a retaliation
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  or a reconciliation.
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  But what do you expect to hear from countries
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  like China
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  and and the other countries that are in the Asian region?
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  You're right.
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  Asian countries have been affected the most.
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  China is in the eye of the storm with an effective rate,
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  as we speak, of 54% or maybe more given retaliatory dynamics.
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  Right.
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  But it hasn't been only China.
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  It's been the China plus one set of countries.
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  A lot of manufacturers over
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  the last few years have diversified away from China
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  and expanded capacity in Vietnam until and in Cambodia.
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  Right.
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  All of this additional markets are feeling
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  the heat of significantly higher tariffs.
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  This is not going to be an easy adjustment period for Asia.
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  But make no mistake, policymakers are going to ease
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  monetary policy, fiscal policy and try to help their economies.
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  A economies adjust and redirect resources.
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  Importantly,
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  towards the end of this month,
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  we've got a leadership meeting out of China.
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  The Politburo meeting is taking place,
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  and we will see a lot more details about
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  just how aggressively Chinese policymakers are going to ease.
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  And you even write in your recent, emerging markets
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  monthly publication that Asian economic growth
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  could decline 1 or 2 percentage points, dropping below 4%.
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  It was 5.1% in 2024.
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  That's significant.
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  It is very sizable.
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  It goes to show the global implications of this decision.
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  And, it once again, if this tariff rates stick,
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  they stay at this levels.
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  We might see a global economic impact
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  with activity coming down across every single region.
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  Right.
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  When we started off after the inauguration,
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  the first three countries
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  we heard mostly about potential
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  tariffs were China, Mexico, Canada.
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  So let's switch over to North America.
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  What a change.
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  It went from three countries to almost every country.
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  So that obviously there was shock when people saw that giant list
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  that they were holding up at the white House on Liberation Day.
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  So let's talk about Latin America
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  specifically, because including Canada
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  in that just in this description,
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  Canada and Mexico really were spared the brunt, as we're saying,
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  contradictory to what we thought would happen
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  because of the Usmca,
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  which covers a big portion of exports to the U.S.
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  but with other Latin American countries,
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  they seem relatively insulated a little bit.
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  So what's the economic impact for Latin America overall?
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  For starters,
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  the fact that Canada and Mexico
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  were the only two countries globally to be excluded
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  from that April 2nd list is quite notable.
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  That's right.
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  And it points to maybe the emergence
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  of a fortress North America trade bloc.
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  Right. Time will tell.
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  We'll see if there's additional changes.
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  But for now, this seems to be a policy priority.
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  You cannot fight everybody at the same time.
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  Mexico and Canada can be part of the solution
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  rather than become part of the problem.
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  But more broadly, in Latin America, it's been quite shocking
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  that every Latin American country was tariff
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  at 10%, the lowest of any other tariff rate out there.
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  And so you're starting to see some headlines,
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  such as Apple exploring the possibility of expanding production
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  in countries such as Brazil.
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  This is not surprising.
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  People are trying to find a way around this new restrictions.
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  Right.
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  And so when you think about how cheap Latin American stocks,
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  bonds and currencies already were placed,
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  the fact that they weren't that affected by tariffs,
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  the region emerges as a relatively safer
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  haven in this time of turbulence.
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  Investment wise.
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  Is that an opportunity then would you then
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  what are basically the question is what are you recommending
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  as somebody who is covering emerging markets?
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  Clearly, given that there's more tariff percentage
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  on Asian countries versus Latin American countries,
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  where do you see the most investment opportunities right now?
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  Look, for starters, if your portfolio is too
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  geographically concentrated, we think that's a mistake.
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  You get to spread your exposure across
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  the Americas, Europe and Asia.
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  If your portfolio is too concentrated in a single asset class,
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  think about stocks.
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  Don't forget you get to have bonds, you get to have alternatives.
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  And in addition, I think this is time to think broadly
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  and consider new asset classes in your repertoire.
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  I'm thinking about gold, for instance.
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  We think this is a very interesting portfolio hedge diversifier.
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  So I think you got to think broadly in
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  whatever recipe has worked for you over the last 15 years.
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  It's unlikely to work again, given how much it's changing.
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  Yeah, gold is an interesting, commodity.
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  As we've seen.
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  It's held up very well comparatively.
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  Obviously there was some profit
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  taking perhaps going on because it did
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  do so well since the beginning of the year and even last year.
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  But obviously there are some good hedges out there,
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  as you described, that are part of our house for you and CIO.
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  Before I let you go, though,
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  Leo, one of the things that keeps coming up
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  is we're hearing more, of our competitors like Goldman Sachs,
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  for example, raising
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  their potential outlook on a recession today.
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  Now they had it at 45%.
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  And I've seen other reports that other,
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  you know, banks
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  and financial institutions are increasing their recession risk.
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  If the US does deep does go into a recession,
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  what does that do for potentially
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  the impact or what kind of impact does it have on Em?
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  Look.
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  And is it a it's a
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  is it a country by country story or is it a blanket statement?
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  Let me start by saying why is it so hard
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  to predict a recession or lack thereof, in in the United States?
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  Because it really all hinges on tariff outlook,
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  and this can change on a dime, right?
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  One day we get one headline,
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  the next day we get a different headline.
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  So, you know, pounding the table.
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  There's going to be a recession.
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  There's not going to be a recession.
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  It's almost impossible
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  in the context of so much change and uncertainty.
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  Now, if the US were to go into a recession,
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  it's the largest economy in the world.
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  It impose tariffs of a significant size
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  in the second largest economy in the world.
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  So this would be a very severe environment.
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  This calls for,
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  patience.
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  Investing align in alignment with your long term goals.
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  But it's not going to be an easy period. Right.
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  And we have seen you mentioned
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  there's a lot of headline risk out there.
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  And, you know,
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  you might see a headline
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  that looks in favor of putting a pause on the tariffs
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  and the markets all of a sudden shift directions with the wind.
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  But then something else comes out
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  and says, no, that's not a real headline.
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  And then markets go down again.
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  So we really are seeing these immediate reactions to news flow.
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  So I think it's all about
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  staying calm, staying the course, working with your advisor.
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  And as you mentioned, having a well diversified portfolio
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  within Em and then outside of that is really a way
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  to feel
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  like you can go to sleep at night and have a little bit of,
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  you know,
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  you could breathe a little bit
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  knowing that the diversified portfolio you have
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  is going to protect you as much as it can.
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  Anyway. Thanks lot.
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  Always good to see you.
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  Thank you. Found lots happening in the Em space.
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  Clearly I mean,
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  you know, a lot of these countries that we're talking about
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  don't get mentioned very much, but now they're becoming,
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  you know, headlines.
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  So we'll have to keep track of that.
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  And keep in touch with you. Thanks.
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  How good to see you.
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  Thank you.
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  Great.
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  Alejo Czerwonko from the Chief Investment Office.
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  And thank you all for joining us.
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  For more information on everything
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  that's coming out of CIO and UBS at large,
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  you can visit our insights website at ubs.com/views.
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  That's our insights page again.
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  And look as we say all the time.
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  And it's really important these days.
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  Make sure you're continuing this conversation
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  with your financial advisor.
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  Until next time, I'm Anthony Pastore.
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  Have a great rest of your day, everyone, and remember
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  to keep your eyes on what's trending. See you soon.