By Brian Swint
All's fair in love and a global trade war.
Donald Trump looks set to reignite his tariff war with China when he returns to the White House. But a different and friendlier region will become collateral damage.
Europe may well be faced with its own Trump tariffs but it's those aimed at Beijing that could be more detrimental for the region. That's because Europe's economy depends more on international markets than domestic, and needs seamless global trade--something that would be impacted by levies.
However, some specific stocks and sectors can still do well even if the European economy overall suffers, particularly as the region's shares are undervalued and due for some amount of catch-up with their U.S. peers. Consumer staples, utilities, and technology are sectors that may be worth a look.
Even before the prospect of tariffs, the outlook for Europe was already darkening-- UBS just downgraded its prediction for the Euro STOXX 50 next year. That index has gained about 7% this year, compared with a 19% increase for the Dow Jones Industrial Average. The continent is still coping with higher energy costs than in the U.S., particularly since Russia invaded Ukraine in 2022, as well as its exposure to the slump in China, another of its major trading partners.
On the campaign trail, Trump said he favored across-the-board tariffs, and on Nov. 25, he promised a 25% tariff on imports from Mexico and Canada, along with an additional 10% tariff on goods from China.
Even if he hasn't spelled it out yet, European companies will probably also have to cope with Trump's tariffs on exports to the U.S.--things like luxury handbags produced by LVMH's Louis Vuitton brand, Ferrari cars made in Italy, or Talisker Scotch whiskey shipped by Diageo. About 20% of exports from the European Union and the U.K. go to the U.S.
But levies on European products may not be that damaging overall, according to strategists at UBS. For one thing, most of what Europe exports are services, not goods, which wouldn't be affected. Second, a lot of what we might think of as European exports, such as Volkswagen or Bayerische Motoren Werke cars, are actually made in the U.S. already, which would also make them exempt from the new levies. And third, Trump's tariffs would probably drive up the dollar against other currencies, which would lessen the impact of the costs on the revenues of European companies.
The greater threat to Europe is how the tariffs affect Asia and the rest of the world.
"My bigger concern is the knock-on effect on global growth and the impact to end demand," said Matthew Gilman, a European equity strategist at UBS. "Tariffs can disrupt supply chains, they increase trade frictions, and we are very exposed to what's going on in global manufacturing."
Other countries will almost certainly retaliate by adding tariffs of their own. China may also respond by ramping up exports elsewhere. Europe would be in its sights--a flood of Chinese imports, as the continent has already seen with electric vehicles, would increase competition and push down prices.
"Certainly Europe is more sensitive to what's going on in China," said Martin Todd, a fund manager at investment manager Federated Hermes. "It's easy to make quite a bearish case for Europe. The obvious push back to that is valuations for European stocks."
Todd points out that there are bright spots--European stocks currently trade at about 14 times forward earnings, which is at the low end of their historic range, Todd said. U.S. stocks, by contrast, are trading at more than 22 times earnings, which, compared with an average of 20 over the past five years, is "well above historic levels."
The outlook isn't all bad for stocks. If the theme of a new Trump administration becomes self-reliance, then UBS sees several sectors that stand to gain in Europe--consumer staples, utilities, and technology.
For consumer staples, the argument is that even though spirits like Scotch would be affected by tariffs, sales of many goods would be unaffected. For example, European consumers will still have to buy household goods from companies like Unilever, which owns Dove soap and more than 30 other brands. Or there's Switzerland-based Nestle, which owns Gerber baby foods. The iShares MSCI Europe Consumer Staples ETF (ticker ESIS) is already beaten down, having dropped about 5% since the start of the year, compared with a 5.8% gain for the STOXX Europe 600 index.
Utilities may do well as companies and countries are forced to invest more in the energy transition away from fossil fuels. Examples include France's EDF or Germany's E.ON. The risk for this sector is an end to the Russia-Ukaine war that lowers natural gas prices again, which might hurt these stocks.
Europe's technology companies haven't had the same spectacular growth as U.S. peers recently, but that could make them interesting. SAP, the German business software company, or semiconductor maker Infineon offer potentially high growth rates, but largely fly under the radar because they don't have their main listing in the U.S.
Defense companies in Europe could benefit if Trump follows through on threats to reduce military support to allies. Other countries may increase their defense spending as a result and France's Thales, Germany's ThyssenKrupp, and the U.K.'s BAE Systems are companies that stand to gain--and all have underperformed the S&P 500 this year.
But with new tariffs in the pipeline that will twist the knife of Europe's vulnerability to Chinese economic weakness, companies across the pond are bracing for turbulence.
Write to Brian Swint at brian.swint@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 03, 2024 01:00 ET (06:00 GMT)
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