Core Viewpoint - UBS reports that de-globalization is a significant trend driving stagflation, with tariffs and de-globalization leading to inefficiencies and potential reductions in actual economic growth rates, alongside increased inflationary pressures [1] Group 1: Economic Impact of Tariffs - UBS estimates that imposing a 60% tariff on 75% of Chinese goods exported to the U.S. and a 10% tariff on goods from other countries could result in a global GDP decline of 0.5% [1] - Inflationary pressures are expected to be volatile, primarily affecting the U.S. economy [1] Group 2: Market Reactions - The bond and stock markets are adjusting to the anticipated tariff increases, with U.S. 10-year real yields dropping by 30-50 basis points and 2-year inflation expectations rising by 70 basis points since January [5] - Tariff-sensitive stocks in the U.S. have underperformed the broader market by 17%, while in Europe, the underperformance is 9% [5] Group 3: Sector Analysis - Analysts in the U.S. are broadly downgrading revenue and earnings growth expectations for tariff-sensitive sectors such as durable goods, automotive, and retail [5] - In Europe, analysts maintain resilient expectations for sectors like automotive, luxury goods, and pharmaceuticals, which are also sensitive to tariffs [5] Group 4: Investment Strategies - UBS suggests that hard assets (gold and energy) are likely to outperform other asset classes due to rising credit and yield risk premiums, with a projected 3% decline in the S&P 500 index [8] - Investors are advised to consider selling put options on gold ETFs (GDX.US) and buying put options on financial sector ETFs (XLF.US) to "harden" risk exposure [8] Group 5: Future Economic Outlook - UBS believes that while the European market shows resilience, cyclical investors face risks, particularly as tariff-sensitive stocks may decline further by 10% due to lowered earnings expectations [9] - The impact of de-globalization is expected to lead to lower actual economic growth rates, increased inflation expectations, and heightened risk premiums associated with corporate profit growth [12]