The import tariff proposed by Donald Trump on goods from the EU may inject some volatility into European stock markets, but investors in European equities remain largely unconcerned.
A 25 per cent trade tariff targeting the economic bloc that owes its existence to “outsmarting America”: the European Union. This is one of the latest proposals from the Trump administration.
Does this signal the end of the larger positions that investors have recently taken in European stocks? ABN Amro and ING have recently adjusted their tactical allocations, and European equity ETFs have seen strong inflows this year.
European companies in the MSCI Europe index generate 26 per cent of their revenues in the U.S. Trade tariffs are inconvenient for exporters, posing a risk for investors who have placed their bets on the now-resurgent European stock market. The Euro Stoxx 600 has risen by over 9 per cent since the beginning of January, while the S&P 500 has posted no gains overall.
However, according to investors, the direct impact of the tariffs is expected to be limited. Only a small portion of European companies’ revenues are subject to the trade tariffs threatened by Trump, and the sectors most affected by the tariffs are, in fact, performing particularly well this year.
Economic Damage
Christoph Berger, head of European equities at AllianzGI, points out that European companies derive approximately 9 per cent of their U.S. revenues from services, and 10.5 per cent from locally produced goods. These categories will largely remain unaffected by the tariffs. Only 6.6 per cent of revenues come from goods exports to the U.S.
“More than half of the exported goods remain untouched by tariffs,” says Berger. “The recent outperformance of European indices may lose some steam, but the economic damage to companies is likely to be limited.”
It seems likely that the tariffs will indeed come into effect. This week, the postponed tariffs on goods from Mexico, China, and Canada were finally implemented. In response, the affected countries immediately announced tariffs on U.S. goods.
Most Vulnerable Sectors
Should tariffs be imposed, certain sectors will undoubtedly face challenges under the new administration in Washington. The automotive sector appears to be the most vulnerable to the proposed tariffs. The import tax could more than double, from the current 10 per cent to 25 per cent. This would impact automakers such as Volkswagen (+17 per cent YTD) and BMW (+3 per cent YTD), who export vehicles to the U.S.
“Partly because no tariffs have been implemented so far this year, the export-sensitive German stock market has performed well since the start of the year,” says Diemer de Vries, portfolio manager at Optimix. “Industrial companies, in particular, have benefited, in part from investments in the European defence industry and the Green Industrial Deal.”
If Trump proceeds with the tariffs, it is likely that sectors such as industry and automotive will take a step back, according to De Vries. Nevertheless, both the DAX and the MiB remain up by roughly 12 per cent and 13 per cent, respectively, this year.
The United States
Investment strategist Simon Wiersma of ING highlights that the U.S. economy will not be immune to the effects of its own import tariffs. Higher import costs for Americans could push inflation up and potentially slow economic growth. Moreover, the lower valuation of European stocks relative to U.S. equities makes them “less risky,” Wiersma adds.
“The U.S. technology sector is very expensive and appears ripe for a correction,” says De Vries. “If that correction hits harder than the impact of the tariffs on Europe, it is far from certain that European outperformance will weaken.”
Opportunities
According to Berger, investors will see the most success with European companies that boast strong brand recognition and pricing power. “The ability to adjust prices and pass on costs to the consumer will become a crucial factor in the market.”
Production locations also play a significant role. Companies with established production in the U.S., such as Nestlé, LVMH, and Unilever, are better positioned to absorb cost increases and avoid disruptions from tariffs.
Additionally, Beter points to companies that are well-positioned to capitalise on structural trends. “Companies tapping into digitalisation, Industry 5.0, AI, and automation often have business models that are barely affected by trade tariffs,” he notes.
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