Sell rallies in stocks as trade shock sets in, says UBS’ Narain

Investing.com -- UBS is urging investors to tread cautiously in equity markets as a global trade shock unfolds, warning that rallies in stocks, particularly across emerging markets (EM), should be sold rather than chased.

“Equities: Sell rallies / buy protection as trade shock sets in,” UBS analysts wrote in a recent strategy note led by Manik Narain. 

The firm sees elevated tariffs and weakening export trends as major headwinds for EM assets, even as they’ve displayed surprising resilience amid U.S. market volatility.

UBS noted that EM equities have outperformed relative to historical patterns. 

“The 9% decline in U.S. equities seen over the past 3m would, historically, have been associated with a ~6% drop in MSCI EM; instead, EM is 1% higher,” they wrote. 

However, the analysts warned that this apparent strength may not last. “EM’s front-loading of exports to the U.S. may be about to hit a wall,” the firm wrote, citing Los Angeles Ports Authority data.

Even if China tariffs are rolled back to 60%, “the U.S. effective tariff rate on the rest of the world would still be ~8x higher than in 2018/19 and its highest since the 1930s,” UBS said. 

UBS said that pressure comes as export growth in EM “is likely on the cusp of recession,” while consensus earnings forecasts—up 13% on a two-year CAGR—look too optimistic.

The firm sees value emerging at around 950 on the MSCI EM Index, representing about 14% downside. 

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Until then, it prefers defensives and fixed income, forecasting that “local debt could beat equities by 7-10% through the rest of this year.”

“This isn’t your grandmother’s USD selloff,” UBS added, citing a scenario of weaker EM exports, wider credit spreads, and front-loaded monetary easing. “We recommend a selective approach.”

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