As Donald Trump gears up for another term in the White House, his proposed tariffs on imports from China, Mexico, and Canada are set to reshape global trade dynamics.
While Europe may face its own set of US tariffs, the region’s greater concern lies in the ripple effects of trade barriers aimed at China, a major economic partner.
Europe, heavily reliant on seamless global trade, risks substantial economic disruptions.
The tariffs threaten to undermine a continent already grappling with high energy costs, inflationary pressures, and sluggish growth exacerbated by Russia’s ongoing conflict in Ukraine.
However, certain stocks and sectors may still thrive despite broader economic challenges in Europe, especially as the region’s undervalued shares show potential to narrow the gap with their US counterparts, Barron’s reports.
Europe’s vulnerability to trade disruptions
Europe’s economic model depends significantly on exports, with roughly 20% of the European Union and the United Kingdom’s exports heading to the US.
Luxury goods, such as LVMH’s Louis Vuitton handbags, Ferrari cars, and Diageo’s Talisker Scotch whiskey, could face higher costs if tariffs are imposed.
However, analysts note that the impact of tariffs on European goods may be limited.
Much of Europe’s exports are services, which are exempt from tariffs, while several high-profile goods like Volkswagen cars are manufactured in the US and would avoid levies.
Yet, the broader threat to Europe stems from the potential disruption to global supply chains and trade frictions.
As UBS European equity strategist Matthew Gilman highlights, “The knock-on effects of tariffs on global growth and end demand are a significant concern.”
Chinese retaliation could intensify challenges
A major worry for Europe is retaliation by other nations, particularly China, which may divert its exports to other regions, including Europe.
The influx of Chinese goods, as seen with electric vehicles, could increase competition and suppress prices, adding further pressure on European manufacturers.
Martin Todd, a fund manager at Federated Hermes, emphasizes Europe’s sensitivity to developments in China.
“Europe is heavily exposed to Chinese manufacturing and economic trends. Any disruption from tariffs could exacerbate existing challenges,” he noted.
Trump tariffs may bring opportunities for undervalued European markets
UBS’s downgrade of its 2024 forecast for the Euro STOXX 50 index underscores the uncertainty surrounding European equities.
The index has gained only 7% this year, compared to the Dow Jones Industrial Average’s 19% rise, reflecting the continent’s economic headwinds.
However, while Trump’s tariff threats compound existing vulnerabilities, they may also catalyze European markets to adjust and attract contrarian investors.
The undervaluation of European equities could lead to selective opportunities, especially in sectors that are less dependent on global trade.
European shares trade at about 14 times forward earnings, a significant discount to US stocks, which average over 22 times earnings.
Analysts see opportunities in undervalued European stocks compared to their US counterparts.
Stocks that show promise despite tariff challenges
Despite the looming challenges, some European sectors show promise.
Consumer staples: Consumer staples may remain resilient despite tariffs on goods like Scotch, as essentials from companies like Unilever and Nestle will still see demand.
The iShares MSCI Europe Consumer Staples ETF (ESIS) is down 5% this year, underperforming the STOXX Europe 600’s 5.8% gain.
Utilities: The energy transition in Europe remains a strong theme.
Companies like France’s EDF and Germany’s E.ON could benefit from long-term investment in renewable energy infrastructure.
However, falling natural gas prices, potentially from an end to the Russia-Ukraine war, may pose risks to these stocks.
Technology: While European tech hasn’t matched US growth, firms like SAP and Infineon offer solid potential.
Their lower profile compared to Silicon Valley giants makes them appealing for contrarian investors.
Defense: Trump’s rhetoric about reducing US military support for allies could prompt increased defense spending in Europe.
Companies like France’s Thales, Germany’s ThyssenKrupp, and the UK’s BAE Systems stand to gain if nations ramp up military budgets.
These firms have underperformed US defense stocks, offering an opportunity for growth in a more self-reliant Europe.
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