Trump Tariffs on China Will Cause Pain Elsewhere: Stocks to Consider

All’s fair in love and a global trade war. With Donald Trump potentially returning to the White House, the talk of renewed tariffs on China has once again come to the forefront. But it’s not just the Chinese economy that may feel the brunt of these measures; Europe stands to be collateral damage in this unfolding trade saga. The implications could be severe, as Europe’s economic landscape is intricately tied to global trade. While overall suffering is expected, some sectors and stocks could still shine through.

The European Landscape: Fragility in the Face of Tariffs

Europe relies heavily on international markets, making it more vulnerable to disruptions caused by tariffs. Indeed, UBS has already downgraded its forecast for the Euro STOXX 50, which has only managed a 7% gain this year, in stark contrast to the astonishing 19% rise of the Dow Jones Industrial Average. The continent remains burdened with higher energy costs, especially in the wake of Russia’s invasion of Ukraine, and a cooling economy vis-à-vis its trading partners, particularly China.

Trump’s rhetoric during his campaign suggested a willingness to impose across-the-board tariffs, including a promising 25% levy on imports from Mexico and Canada, coupled with an additional 10% on goods from China. Although he has yet to fully disclose the specifics of his plan concerning Europe, it’s undeniable that European exports to the U.S. will be affected. Industries such as luxury handbags from LVMH, Ferrari’s vehicles, and Talisker Scotch whiskey from Diageo will be caught in the inevitable crossfire.

Potential Impact on European Exports

The European Union and U.K. derive around 20% of their exports to the U.S., so the potential for disrupted trade flow cannot be overstated. However, analysts at UBS remain cautiously optimistic. A substantial portion of European exports are services, which would be less hit by tariffs than goods. Furthermore, many renowned European brands manufacture their products in the U.S., thus shielding them from these new trade barriers. And as the dollar may strengthen due to tariffs, European companies could find some respite from the inflated costs.

Global Growth Concerns

Perhaps the most pressing concern is not just the immediate impact on European firms but the broader ramifications for global growth. Global supply chains face disruption, trade friction could escalate, and countries might retaliate with tariffs of their own, potentially leading to a worldwide economic slowdown. China’s possible response might involve redirecting its exports toward Europe, putting further pressure on European markets.

Valuation Perspectives and Opportunities

In a dire economic environment, strategic sectors may offer refuge. Say what you will about Europe’s economic malaise; valuations are currently on the low end of the historic range, with European stocks trading at about 14 times forward earnings compared to U.S. stocks, which trade at over 22 times earnings. This disparity indicates the potential for European stocks to catch up, and it highlights the opportunity for prudent investors.

Sectors to Watch

Despite the gloom surrounding the European economy, the consumer staples, utilities, and technology sectors offer intriguing investment potential. Consumer staples companies like Unilever, with its diverse range of household products, and Nestlé, renowned for providing essential food products, are likely to remain unaffected by tariffs. ETFs such as the iShares MSCI Europe Consumer Staples ETF (ticker ESIS) have seen lower performance; thus, presenting potential for rebound.

Utilities may also thrive as investments pivot towards sustainable energy solutions, with companies like EDF and E.ON taking advantage of this transition. The technology sector, while slower to gain traction than its U.S. equivalents, includes promising players such as SAP and Infineon that could yield higher growth opportunities.

Defense Spending Opportunities

In the wake of potential reductions in military support to allies by the Trump administration, defense companies in Europe may also see a boost. Nations may feel compelled to raise defense budgets, benefitting companies like Thales, ThyssenKrupp, and the BAE Systems, all of which have lagged behind the S&P 500 this year.

Conclusion: Facing Turbulence with Resolve

In conclusion, while European economies brace for the deleterious impacts of renewed tariffs, there are still pockets of opportunity to be explored. As markets react to Trump’s forthcoming policies, vigilant investors should consider sectors that demonstrate resilience and growth potential despite the clouds of economic uncertainty. Traditional principles of investing in undervalued assets may well prevail as we navigate the choppy waters of a new era in global trade.