Analysts at UBS said in a note Friday that if the current trade tensions between China and the United States enhances further and turns into a full-blown trade war, there can be steep drops in global stock markets which would not be desirable for investors.

The Swiss bank had estimated through its calculations that profits for the S&P listed companies would get a reduction of 14.6 percent if it is assumed that all of the volume of trade between the US and China becomes subject to tariffs and is impacted by them and similar other protectionist policies. The bank has further calculated that the U.S. and global growth rates would be lower by 245 and 108.5 basis points respectively.

However, warning of second-order effects was also noted by the bank. These “would be larger, with U.S. multinationals doing business in China also likely to be hurt by China retaliation.”  And hence, with respect to the valuations for companies, these would cause an additional negative impact of 9.1 per cent which would bring the total downside of 21.3 per cent for the U.S. benchmark after the UBS has made by some further adjustments.

Chinese solar panels, washing machines, steel and aluminum have so far come under new import tariffs imposed by United States President Donald Trump in addition to other imported goods on the pretext of theft of intellectual property. And every time there has been a retaliation by China. But analysts fear that there are chances of more tariffs coming along because of threats from trump of imposition of additional tariffs on Chinese goods worth as much as $200 billion.

“If I was sitting in Beijing, I would be pretty worried”, said David Riley, the chief investment strategist at BlueBay Asset Management, to a television news channel on Friday.

“I think we are going to get potentially more tariffs imposed on China coming at the end of the month, or early September,” he said.

Primarily because of recent statements from U.S. and European leaders, no preparation for trade war is being made by equity investors, warned UBS analysts on Friday.

An agreement was reached on Wednesday between the European Union and the US where both the parties agreed not to engage in a trade spat and deliberate to eliminating of trade tariffs and barriers after a meeting between Trump and the European Commissioner President Jean-Claude Juncker. However, auto tariffs have been left out of the ambit for the time being as well as it also has left scope for new tariffs at a later stage.

“Equities are not yet discounting a trade war scenario and we see a 20 percent-plus decline driven by a combination of lower earnings and multiple contraction (which means that markets will start paying a lot less for the same amount of earnings),” UBS noted.

(Adapted form CNBC.com)