UBS Equities-Global Equity Strategy _EM is it a GEM Upgrade to overweig...-117645649

ab5 September 2025Global ResearchGlobal Equity StrategyEM: is it a GEM? Upgrade to overweight, tactically.We upgrade EM to overweight, tactically, from benchmark to reflect: 1) Global macro backdrop: weaker dollar (10% off the USD leads to c9% outperformance); falling US short rates (UBS sees US rates falling by 1% by year-end – EM are the best performing markets when the 2-year note yield falls) and the UBS China credit impulse is close to a 4-year high (at 4% of GDP), which tends to lead EM performance by 6 months; 2) EM ranks number 2 on our aggregate scorecard only because abnormally loose monetary conditions in Japan (which are likely to change) keep it out of the top place; 3) Valuation: we find EM equities on a P/E discount of 27% vs global (9% below its norm) – despite output gaps being higher in EM than DM (i.e. earnings are cyclically more depressed) and the market would need to rise by 33% for the dividend yield relative to global markets to return to its norm); 4) Monetary policy flexibility – in most cases (other than Brazil), EM are in easing mode with inflation at or below their central banks' upper bands (EM inflation in aggregate is just 2.4% ex China) – and the short maturity of debt means the rate sensitivity of EM is higher than DM; 5) On crowding data, investors are net short versus their norm (and positioning relative to the US is at lows when we look at the UBS data history). For context, EM vs DM price relative is close to its Asian crisis lows. Other advantages include a better fiscal position in general than DM.Where are the risks? i) China nominal GDP is set to slow to 3.3% in 2026 from 3.9% yoy in Q2 25 – but the key, in our view, is that China is starting to address its chronic excess capacity – see here; ii) tariffs (80% of the US trade deficit is with EM) but not only do EM have a policy response to this (fiscal and monetary easing), much of the tariff issues are overtly political (Brazil and India, and in many instances much of their exports can be redirected – see here), and China has a strong negotiating position; iii) earnings revisions have deteriorated, but much of this is due to one-off factors, e.g. tariffs/NT/Won strength.What to buy? The EM team are overweight China, Brazil, Indonesia and the Philippines. We agree and have a detailed discussion inside on the major markets. China (dividend yield on par with junk bond yield, excess liquidity, clear signs of capital discipline, improved corporate governance, foreign investors very underweight, strong negotiating position on tariffs versus the US). Brazil (nearly 2 std cheap, inflation-adjusted rates at 10% set to fall. India (best structural growth story) has recoupled with its PMI differential and is no longer expensive – for the first time since Covid. It also would benefit disproportionately from the UBS expectation for a falling oil price. If the dollar weakens and short rates fall more than expected, we could return to the 1992-94 analogu