2024-10-27 05:00:00
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The prospect of Donald Trump imposing a raft of new tariffs if he wins next month’s US presidential election has hit the shares of export-sensitive European companies such as carmakers and luxury goods groups.
A basket of 28 European stocks exposed to US tariffs compiled by Barclays has tumbled 7 per cent since late September as the former president’s odds of an election victory shorten. The basket, which includes Diageo, LVMH and Volkswagen, is now down 2 per cent so far this year, compared with an 8 per cent rise for the broader European stock market.
The declines show how Trump’s promise to launch a trade war if he wins a second term in the White House is piling further pressure on industries already struggling with lacklustre domestic economies and a slowdown in demand from their key markets in China.
“These sectors are facing a triple whammy of the Trump effect, EU growth stagnation and China’s slowdown,” said Luca Paolini, chief strategist at Pictet Asset Management.
Europe’s equity markets have lagged behind the big tech-powered rally on Wall Street this year, with the S&P 500 up more than 20 per cent. Many analysts expect Trump’s tax-cutting agenda to boost the US stock market, so any damage done to European exporters threatens to widen the disparity even further.
Trump has said he will introduce steep levies on imported goods, setting tariffs at 20 per cent for Europe and 60 per cent for China, prompting the IMF to warn that his policies would endanger global growth.
Emmanuel Cau, head of European equity strategy at Barclays, said markets were being driven by the growing likelihood implied by prediction markets that the Republicans will secure a so-called red sweep, taking the presidency and both houses of Congress.
Cryptocurrency-based exchange Polymarket now puts Trump’s odds of winning the presidency at 62 per cent, up from 48 per cent a month ago.
“In the last month the Trump trade has gone full steam ahead,” Cau said.
The resurgence of so-called “Trump trades” has also boosted the dollar in recent weeks and added fuel to a sell-off in the US Treasury market, given his tariff-driven agenda is expected to increase inflation and interest rates.
Several companies in the Barclays’ basket earn more than 30 per cent of their revenues in the US, including Daimler Truck, chemicals group Arkema and Diageo.
However, some analysts think the gloom around Europe’s markets is overdone.
Hugh Gimber, global market strategist at JPMorgan Asset Management, said that the European markets are trading at a 40 per cent discount relative to the US, partially reflecting the threat of renewed trade hostilities. “This negativity now appears to be well reflected in prices,” he said.
Marc Schartz, a portfolio manager at Janus Henderson, said he expects a broader equity rally following a Republican sweep, that would also benefit European stocks.
“If we get a decisive winner, it will be supportive for markets,” he added.
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Interview with Luca Paolini, Chief Strategist at Pictet Asset Management
Interviewer: Good morning, Luca. With the US presidential election around the corner, it seems like Donald Trump’s possible return to power is creating ripples in European markets. Can you elaborate on how his potential tariff policies are affecting European companies?
Luca Paolini: Good morning! Yes, we’re seeing significant concern among European firms, especially those that are export-sensitive, like car manufacturers and luxury goods companies. Since late September, a diverse basket of 28 European stocks that are particularly exposed to US tariffs has declined by about 7%. This is troubling, especially given the overall European stock market is only down by 2% this year while the S&P 500 has surged more than 20%.
Interviewer: That’s a stark contrast. What do you think is driving the declines in these European stocks?
Luca Paolini: We’re witnessing what I would describe as a ‘triple whammy.’ On one hand, you have the potential for a renewed trade war under Trump’s leadership, which directly threatens these sectors. On the other hand, there’s economic stagnation in the EU itself, coupled with a slowdown in demand from China—a crucial market for many European exporters. These factors combined create a precarious situation for industries already under pressure.
Interviewer: So, if Trump does win the election and acts on his tariff promises, how would you predict that might play out for EU markets in the long term?
Luca Paolini: If tariffs are imposed, it could exacerbate the challenges already faced by European exporters, deepening economic vulnerabilities. In the long term, if US markets benefit from Trump’s tax cuts while European markets lag, we could see a widening economic gap. It’s essential for European companies to strategize on diversifying their markets and enhancing resilience against these external pressures.
Interviewer: Thank you for your insights, Luca. It seems there’s a lot at stake as we approach the election.
Luca Paolini: Absolutely, the implications of this election extend far beyond US borders, and they should be a major concern for global investors. Thank you for having me.
Interview with Luca Paolini, Chief Strategist at Pictet Asset Management
Interviewer: Good morning, Luca. With the US presidential election around the corner, it seems like Donald Trump’s possible return to power is creating ripples in European markets. Can you elaborate on how his potential tariff policies are affecting European companies?
Luca Paolini: Good morning! Yes, we’re seeing significant concern among European firms, especially those that are export-sensitive, like car manufacturers and luxury goods companies. Since late September, a diverse basket of 28 European stocks that are particularly exposed to US tariffs has declined by about 7%. This is troubling, especially given the overall European stock market is only down by 2% this year while the S&P 500 has surged more than 20%.
Interviewer: That’s a stark contrast. What do you think is driving the declines in these European stocks?
Luca Paolini: We’re witnessing a “triple whammy” effect here. First, there’s the Trump effect, where the prospect of increased tariffs under a potential second Trump term is weighing heavily on investor sentiment. Secondly, there’s stagnant growth in the EU, and thirdly, a slowdown in demand from key markets like China. All these factors contribute to the poor performance we’re seeing in export-sensitive sectors.
Interviewer: The declines in value must be alarming for investors. Are there any particular companies or sectors you think are most at risk?
Luca Paolini: Absolutely. Companies like Diageo, Volkswagen, and luxury brands under LVMH are directly exposed due to their significant revenue streams coming from the US market. If tariffs are indeed imposed, it could severely impact their profit margins and overall growth prospects.
Interviewer: What do you think will happen if Trump wins? Is there a silver lining for European stocks?
Luca Paolini: If Trump wins, we could see even more aggressive trade policies, which would likely exacerbate current market dynamics. However, some analysts believe that the negative sentiment around European markets may be overdone, considering they’re trading at a significant discount relative to the US. If we see a decisive winner, this clarity could lead to a broader equity rally that may benefit European stocks despite the looming tariff threats.
Interviewer: That brings some hope for European investors. how should they be preparing for the upcoming election and its potential consequences?
Luca Paolini: Investors should closely monitor the election predictions and market sentiment as they are crucial indicators of potential volatility. It’s essential to focus on diversified portfolios, perhaps looking for sectors less exposed to US tariffs. Being prepared for swift market changes is vital as the landscape could shift dramatically post-election.
Interviewer: Thank you, Luca, for your insights. It’s certainly a complex time for European markets as we approach the election.
Luca Paolini: Thank you! It’s been a pleasure discussing this critical topic.
