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UBS warns against German, Japanese equities exposure as trade war fears loom

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UBS warns against German, Japanese equities exposure as trade war fears loom

UBS has advised investors to ensure they are not overexposed to export-oriented equity regions such as Germany and Japan, as a recent U.S. decision to impose import tariffs of 25% on steel and 10% on aluminum has sparked fears over a spiral of retaliation and increased global protectionism.

While exemptions from the U.S. tariffs granted to various countries and limited retaliation so far could limit the economic impact of President Donald Trump's move, UBS advised caution.

"Our base case is that a full scale trade war will be avoided, but escalation remains a threat and investors may want to consider measures to ensure they are adequately diversified against the risk case," UBS chief investment officer Mark Haefele said in a research report.

"Investors who wish to protect their portfolios against the risk case of a full-scale trade war should ensure they are not over-exposed to export-oriented equity regions (Germany, Japan) or sectors (machinery, car manufacturing), and ensure adequate global diversification, including assets in the US, where some sectors could benefit directly from the tariffs (e.g. steel manufacturers)." he said.

U.S. President Donald Trump signed the tariff decision March 8 but exempted Canada and Mexico, and announced other countries could also negotiate for a potential exemption. Trade representatives of both the EU and Japan have asked for an exemption from the new tariffs.

The likelihood of a"full-blown international trade conflict" is fairly low, according to Haefele.

"Over the coming six to 12 months we see a 20-30% chance of a full-scale trade war," he said.

One sector which may be targeted by the U.S. is the consumer electronics industry, according to Haefele.

"If Trump is serious about sharply reducing the country's trade deficit with Asia, particularly China, he might consider trade restrictions on the IT consumer electronics supply chain. Telecommunication and data-processing equipment account for about $130 billion of the U.S.-China bilateral trade deficit and such a move would be a serious trade shock," the UBS CIO said in his note.