Top of the Morning: Emerging Markets - Reflections on US and Brazil’s elections

Alejo Czerwonko · UBS

Brazil's fiscal dynamics are unsustainable; negative sentiment on Brazilian assets persists until fiscal clarity emerges.

Brazil's fourth Lula term starts with debt at about 80% of GDP, a nominal fiscal deficit near 10% of GDP and interest rates of roughly 14-15%. Lula made social-spending promises to win, which add to the fiscal pressure. The new government must deliver quantifiable fiscal consolidation (raising taxes or cutting spending) and a strategy to pass it through a hostile Congress shaped by the first round. Until that fiscal clarity arrives, the negative sentiment hitting Brazilian assets is unlikely to fade. Further downside is seen as relatively limited because Congress will act as a check and Brazil benefits from global demand for food, energy and critical-mineral security. Things may still get worse before they improve, and tactically there is little urgency to act.

“Fiscal dynamics are unsustainable and the cherry on top is that Lula, in order to win, made a number of promises”at 4:45

Alejo Czerwonko · UBS

Emerging-market dollar bonds, corporate and sovereign, offer high-quality issuers and an appealing yield.

In fixed income, investors can access high-quality issuers and collect an appealing yield on emerging-market dollar-denominated bonds, from both corporate and sovereign issuers. Emerging markets are presented as a useful diversifier in portfolios. The speaker frames this as an attractive yield opportunity rather than a timed call.

“you're getting high quality issuers and you can collect an appealing yield on emerging markets dollar denominated bonds on the corporate and on the sovereign side.”at 13:13

Alejo Czerwonko · UBS

Brazilian stocks at about 8x earnings look cheap versus their own history; patient investors might engage now.

Brazilian equities trade at about 8 times earnings, a low multiple and a discount to their own history. Domestic interest rates of 14-15% already price in very limited expectations of fiscal clean-up, so much of the bad news is in the price. Strategically, from a medium-term perspective, this makes the market attractive for patient investors, though there are no immediate triggers for a rebound and tactically there is little urgency.

“Today, you can buy Brazilian stocks at eight times earnings. This is a low number and discount to its own history.”at 7:45

Alejo Czerwonko · UBS

Ex-US equities, including emerging markets and Europe, should trade higher over twelve months on earnings growth.

The same earnings growth that supports the US equity view is seen across the world, so equities should trade higher outside the US too, including emerging markets and Europe. Emerging-market equities have outperformed US stocks for roughly the last two years, though volatility is a defining feature of the asset class. The view is framed on a twelve-month horizon.

“equity should trade higher in The US but also Ex US including Emerging markets and Europe.”at 11:57

Alejo Czerwonko · UBS

The midterm result matters less for markets than growth, inflation, monetary policy, earnings and AI investment.

A Democratic sweep of both chambers changes the domestic legislative agenda and adds congressional oversight and checks on the executive. But trade, immigration and foreign policy remain largely under presidential authority, and presidents on their way out tend to focus on foreign affairs. The election signals an evolving US political ecosystem, but the drivers that matter for markets are economic growth, inflation, monetary policy, earnings growth, the AI investment cycle and geopolitical realities. Investors should focus on these fundamentals and avoid political noise.

“we've been arguing that this election doesn't matter all that much. Yes, it sends a signal about an evolving political ecosystem in The US, but you should ultimately be looking at economic growth...”at 10:02

Alejo Czerwonko · UBS

Solid earnings growth into 2027 is the backbone of an equity bull market that should keep US stocks rising.

Economic growth remains healthy in the US, Asia, Latin America and parts of Europe. That growth is translating into earnings growth at companies worldwide, confirmed in the third-quarter earnings season. Earnings growth dynamics should remain solid into 2027, and this is the backbone of an equity bull market that should continue. On a twelve-month view, equities should trade higher in the US.

“This earnings growth dynamics are gonna remain solid into 2027 and we think this is the backbone of an equity bull market that should continue.”at 11:50

Alejo Czerwonko · UBS

Favors short-to-intermediate global bonds after the rate repricing; cautious on long ends given fiscal strain.

Interest rates have repriced meaningfully over the last two months, so fixed income deserves fresh attention. Opportunities exist in the short and intermediate segments of global curves. The team is more cautious on the longer end because fiscal dynamics in Brazil, the US and many other places are very challenging.

“We are a little cautious on the longer end of the curves given fiscal dynamics in Brazil, in The US and so many places being so challenging.”at 12:34

Alejo Czerwonko · UBS

Commodities remain a positive view; demand for copper, aluminum, gold, oil and gas will stay very strong.

The team continues to view commodities positively. It expects demand dynamics for copper, aluminum, gold, oil and gas to remain very strong. Brazil's commodity base is linked to global needs for food security, energy security and critical minerals, which supports the broader commodity argument. No specific time frame or mechanism beyond demand strength is given.

“We think demand dynamics for copper, aluminum, gold, oil, gas will continue very strong.”at 12:46