Trump Tariffs on China Will Cause Pain Elsewhere: Stocks to Play It
As former President Donald Trump prepares to return to the White House, the likelihood of reinvigorating his tariff war with China looms large. However, the collateral damage may not be limited to China alone; Europe is primed to face its own challenges as a result of these renewed tariffs. The European economy has significant dependencies on international markets, and disruptions to seamless global trade could have profound effects on the region.
The Impact of Tariffs on Europe’s Economy
European markets are particularly vulnerable given their reliance on stable trade relationships. The potential for Trump’s return to tariffs on imports from China poses a significant threat not only to China but also to the broader global economy. A recent downgrade from UBS on its Euro STOXX 50 forecast highlights an already bleak outlook for Europe. The index has recorded a modest 7% gain for the year, in stark contrast to the 19% increase seen in the Dow Jones Industrial Average.
Further complicating matters are ongoing challenges like higher energy costs, worsened by the fallout from Russia’s invasion of Ukraine, and economic slowdowns in major trading partners like China. Trump’s promise of a 25% tariff on imports from Mexico and Canada and an additional 10% on goods from China shakes the foundation of trade dependencies for many European businesses.
What European Companies Should Expect
While European companies are likely to face tariffs on exports to the U.S.—particularly affecting luxury goods from brands such as LVMH and Ferrari—strategists at UBS suggest that these tariffs may not portend disaster. This is mainly because a significant portion of European exports consists of services rather than goods, and many products traditionally associated with Europe, like Volkswagen and BMW vehicles, are already manufactured domestically in the U.S.
Moreover, a potential rise in the dollar could lessen the impact of costs on European revenues. The real concern lies in how these tariffs could influence global demand. Matthew Gilman, a European equity strategist at UBS, emphasizes that trade disruptions could foster complications in supply chains and constrict demand globally. Additionally, retaliatory tariffs from other countries are expected, increasing the competitive pressure on Europe from Asian countries like China.
Opportunities Amidst Challenges
Despite these looming threats, there are sectors poised for performance even in a sluggish European economy. Consumer staples, utilities, and certain segments of technology provide promising investment opportunities.
Consumer Staples
Investing in consumer staple companies such as Unilever and Nestlé can prove resilient. Even if certain products suffer from tariffs, demand for essential goods remains unaffected. The iShares MSCI Europe Consumer Staples ETF (ticker ESIS) has already seen declines, positioning it as a recovery candidate.
Utilities
Utilities may shine as companies seek to ramp up investments in energy transition initiatives. Utilities like EDF from France and E.ON from Germany could benefit from the global shift away from fossil fuels. However, this sector is not without risks; a resolution to the Russia-Ukraine conflict that lowers energy prices could pose challenges to these stocks.
Technology Sector Potential
While European tech companies have not experienced the same explosive growth as their U.S. counterparts, they present an opportunity for better valuations currently, trading at about 14 times forward earnings—much lower than the 22 times seen in U.S. stocks. Companies like SAP and Infineon could present attractive prospects for growth in the future.
Defense Sector Growth
If the Trump administration opts to diminish military support for allies, this might push other countries to increase their defense spending. This movement could favor European defense contractors like Thales from France, ThyssenKrupp from Germany, and BAE Systems from the U.K., all of which have underperformed relative to the S&P 500.
Conclusion
While the impact of Trump’s tariffs may introduce turbulence for Europe, strategists are optimistic. The potential for catch-up growth in undervalued European stocks amidst ongoing geopolitical shifts could provide favorable investment opportunities. As companies brace for potential hurdles stemming from U.S.-China trade conflicts and greater competition from Asia, Europe’s economic landscape remains complex yet ripe for exploration.