UBS Equities-Global Strategy _EM What if Jan 21st changes the game_ Nar...-119756836

ab14 January 2026Global ResearchGlobal StrategyEM: What if Jan 21st changes the game?Jan 21 may present the biggest test of Fed independence to dateFollowing the US DoJ's recent investigation, a potentially even larger test of Fed independence looms next week. The US Supreme Court hearing on Jan 21 will likely provide greater clarity on whether Governor Cook must step aside from her role while charges against her are considered (even though a formal ruling isn't expected for several months - see more from our US economists here). It's a tail risk, but indications that her removal is potentially imminent could represent a much larger erosion of Fed independence than seen over the past year, in our view, reigniting questions around the dollar's role as a safe haven and prospects for accelerated diversification into EM. On the latter, note that net portfolio flows to EM were near-record lows last year amid unprecedented resident outflows, while our daily proxy of foreign flows into EM ex China equities was negative last year (only ½ of which was India). So, if confidence in the USD were to be undermined, there appears to be clear potential for EM portfolio flows to recover. It isn't our base case but in this brief note we consider implications for EM if this scenario were to unfold. For more on our baseline views, click here. Risk of steeper curves, longer MSCI EM outperformance, higher gold & FX vol The stability of both US breakeven inflation expectations and global FX implied vol heading into next week suggest that markets are ascribing a low probability to Fed independence being seriously compromised. As such, developments next week pose asymmetric risk, we think. Thoughts by asset class:Equities: Higher US bond yields could drive near term consolidation in global equities - ex China, equity risk premia for MSCI EM is below historical averages. That said, prospects for renewed dollar weakness, milder increases in EM than US bond yields, and higher inflation breakevens benefitting real over nominal assets (only 7% of US bonds are inflation-linked) would likely bolster the case for portfolio diversification into EM equity. MSCI EM outperformance over the US could extend longer than we’re currently projecting: our Global Equity Strategy team, led by Andrew Garthwaite, remains tactically OW MSCI EM into Q1. Within EM we are most bullish on China and Brazil among larger markets. The bullish thesis for South Africa (alongside Brazil, one of the top markets in our equity fundamentals scorecard) increases notably in this scenario, too, as discussed below. The case for EM outperformance would be stronger still if China's March NPC also outlines concrete steps to reorient policy away from its supply-centric focus in recent years towards domestic demand; the November US-China trade truce has arguably increased the probability of this outcome. While there are few historical parallels to work with, historically a combination of higher US breakevens & lowe