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JPMorgan says that tariffs will have a'meaningful impact' on over a third EM companies

JPMorgan says that tariffs will have a'meaningful impact' on over a third EM companies

Analysts at JPMorgan estimate that more than a third (35%) of emerging market firms will be "significantly" affected by U.S. tariffs once they are implemented.

Taking into account the possibility that Chinese and Mexican companies would be hard hit, they estimated that 36 percent of the over 750 firms in the closely watched CEMBI EM Corporate Debt Index by the bank would fall under this bracket. In that bracket, 16% of companies could experience a "significant impact".

The 36% figure was described as "not negligible" by the analysts, although they did point out that over half of the companies in the index may only be "minimally " affected.

CEMBI's index includes 6,3% of companies from China, and 4,3% from Mexico. A breakdown of the sectors most affected by the CEMBI shows that 9% of firms are industrial and 6.5% are metals and mining.

JPMorgan's study also found that the average spread or interest rate premium that investors require to hold EM debt does not currently indicate that markets are pricing the type of tariffs that could cause a U.S. economic recession.

The spread is now 226 basis point, up from 190 in recent weeks. However, it's still over 100 basis points lower than its average post-2010 of 320 basis point.

The spread could increase to close to 300 basis points if recession fears start to grow, as it did in 2018, when U.S. president Donald Trump sparked the first trade tensions.

The CEMBI spread widened by 132 basis points or 60% in just nine months. This was higher than the spreads on EM sovereign debt and U.S. Corporate Credit spreads.

The weight of Asia's exposed sectors is now 21%. This is a smaller number than the previous time, when it was 35%. The slightly higher weighting of industrials has been more than offset by the lower contribution of the commodities sector.

CEMBI is made up of firms from the region, which make up a little over 40%. It has a large group of tech exporters who may be affected by tariffs.

Mexico is the most vulnerable country in Latin America. This is not surprising, given that more than 80% of Mexico’s exports go to the U.S. Other major economies, such as Brazil, should be less at risk.

JPMorgan published a report on Wednesday that said: "There will be natural differentiation between countries in terms sectors that are more or less affected, and those with further mitigating factor such as U.S. Operations."

(source: Reuters)