European Equities
As Donald Trump’s ‘America First’ trade agenda
turns from steel imports to Asian technology and intellectual property,
a global trade war is now seen as the most serious risk for global
investors, according to a recent survey.
The growing
protectionist rhetoric has helped push Europe’s Stoxx 600 index down
more than 2 percent this week. Tech stocks have fallen furthest, not
helped by the scandal over misuse of Facebook users’ personal data.
For
now, though, the reaction of European industrial stocks that could
suffer most in a real trade war does not convey a sense of panic.
An
index of the region’s industrial companies .MIEU0IN00GEU fell sharply
in early March when the U.S. President proposed import tariffs on steel
and aluminium. Since then they have recovered and performed largely in
line with their U.S. peers .MIUS0IN00PUS.
The next test comes later on Thursday, when Washington is
expected to unveil up to $60 billion in new tariffs on China targeting
technology, telecoms and intellectual property.
Edmund
Shing, head of equity derivatives strategy at BNP Paribas, notes that
U.S. investors have been investing a lot more in foreign equities and
emerging markets recently.
This, said Shing, is because investors think Trump’s tariff
moves are a negotiating tactic to secure better terms with the European
Union, China and NAFTA partners “as opposed to a particular desire to
ratchet up on actual tariffs per se”.
Goldman Sachs
said we are “probably approaching peak trade risk in the near-term”,
while Citi analysts reckon the recent growth in world trade will
overcome the impact of tariffs.
They point to figures
showing strong growth in global goods trade volumes in 2017, and note
that trade growth has now surpassed global GDP growth once again.
“For
now, our base case is for moderate increases in global protectionism
and for these to mostly remain targeted at specific sectors,” they
wrote.
Shares in European industries in the firing line
of a potential trade war took a hit on March 2 after Trump proposed the
steel and aluminium tariffs, and steelmakers have continued to weaken:
But U.S. aerospace companies have underperformed Europe’s -
possibly reflecting the higher risk of trade retaliation damaging U.S.
defence exports. Boeing jets have often been cited as a potential target
by China, which has been developing the C919 as part of its civil
aerospace ambitions.
Automakers - big consumers of
steel - have had a mixed run, but two of the European manufacturers most
exposed to the United States - BMW and Fiat Chrysler - are trading back
where they were before Trump’s tariff announcement.
The
chart below shows European aerospace and autos stocks (purple and blue)
have recovered from sharp losses after the Trump announcement to
slightly outperform their U.S. counterparts (orange and green).
“Risks (for the auto industry) are mitigated somewhat by
high use of locally produced (c80%) and recycled (c40%) steel,” Citi
analysts said in a note on trade war risk.
The relative
resilience of European industrial stocks can’t be explained by an
improving economic picture. Euro area PMI data - a key indicator of
industrial sentiment - saw their sharpest monthly fall in six years at
the end of February, while comparable U.S. indicators are on the up.
Economists
see only a small impact on the global economy of the higher U.S. steel
and aluminium tariffs. But a full-blown trade war would be something
else.
The OECD projects that a permanent 10
percent rise in trade costs would lower global gross domestic product by
1-1.5 pct in the medium term, in figures cited by Citi analysts.
European
drinks maker shares dropped when Trump’s steel move prompted the
European Union to threaten higher tariffs on imported American whiskey.
Simon Hales, Citi’s EMEA beverages analyst, said any EU
retaliation around imported American whisky could prompt U.S.
retaliation targeting imported EU spirits.
But for now investors appear to be taking that in their stride
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