European espresso: Europe can adapt to any US election outcome
As part of our Espresso series, providing an expert blend of views on European equities, Portfolio Analyst Federico Borin considers the impact of the ‘Trump trade’ ahead of the vote, and the potential for European equities to benefit from reduced uncertainty, regardless of the election result.
3 minute watch
Key takeaways:
- Investors have already partially priced in a Trump win, leading to a ‘Trump trade’ effect, impacting those companies expected to benefit (or lose out from) under a Trump presidency.
- The risk of tariffs on European companies has added to uncertainty, but many European-listed companies operating in the US are already insulated from these policies or could potentially benefit.
- Risk assets have generally tended to respond positively in the months following an election, as uncertainty prior to the vote unwinds. European equities could benefit from this tailwind, whatever the result.
As we approach November 5th, the [US] Presidential elections have become a major focus for the markets. A closely watched data point is the polling market betting odds, which currently indicate a 65-66 per cent chance of a Trump win.
Since the beginning of the year the only time the odds were higher was following the first assassination attempt. The two main themes associated with a Trump presidency are tax deductions to boost growth, or at least earnings, and tariffs to incentivise the re-shoring of industrial activity, along with an increased public deficit.
With the odds of a Trump win rising, the past month has seen the ‘Trump trade’ surge. Long-term yields have increased, as these measures are viewed as potentially inflationary. Additionally, in European equities, a basket of ‘Trump winners’ has outperformed the wider European market by 2% month to date (at the time of recording, to 30 October 2024).
On first inspection, Trump tariffs are bad news for the export-heavy European market, but what this misses is that many European-listed businesses produce the goods in America that they sell in America, and generate the majority of their earnings in the US and elsewhere. Some many even benefit from increased construction, driven by the tariff-led re-shoring of industrial activity, and the boost in US oil production, which Trump is keen to incentivise. Ordinarily speaking, they would benefit from a stronger American consumer.
Given the anticipation of a Trump win has been partially factored into the market, we might see a reversal of the recent trends if Kamala Harris wins. But what we find more relevant, in our discussions with companies about their 2025 expectations, [is that] they convey a message of high uncertainty, which is typical as a presidential election approaches.
It is also true that uncertainty generally has a negative impact on risk assets. This might explain why, based on historical performance since 1988, the STOXX 600 Index tends to consolidate leading up to an election, then rally in the following three months as uncertainty diminishes, regardless of the outcome.
This pattern may be particularly relevant now for Europe, given the trade uncertainties and the war in Ukraine have likely affected flows in European equities this year. On a forward price-to-earnings (PE) ratio, Europe is 40% cheaper than US equities. Europe has never been this cheap.
In summary, there are three key points to consider for European Equities:
- Over the past month, the market has partially priced in a Trump win, which could continue or reverse depending on the election’s outcome.
- Although some policies could negatively impact Europe, several European-listed companies are either insulated from these policies or stand to benefit directly.
- Uncertainty is generally detrimental to risk assets. But historically, reduced uncertainty, regardless of the election result, has been positive for the asset class and it might be especially true today.
Please note: Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Inflation: The rate at which the prices of goods and services are rising in an economy. The Consumer Price Index (CPI) and Retail Price Index (RPI) are two common measures. If a policy is expected to push up prices, it is considered ‘inflationary’.
Price-to-earnings (P/E) ratio: A popular ratio used to value a company’s shares, compared to other stocks, or a benchmark index. It is calculated by dividing the current share price by its earnings per share. It is calculated by dividing the current share price (P) by its earnings per share (E). Forward P/E is a version of the P/E ratio that utilises forecasted earnings in its calculation.
Risk assets: Financial securities that may be subject to significant price movements (ie. carrying a greater degree of risk). Examples include equities, commodities, property lower-quality bonds or some currencies.
STOXX 600: A broad measure of the European equity market, comprising a diverse index of 600 European companies, spanning stocks across 17 countries and 11 industries.
Trump trade: Some investors have already changed their investment behaviour in anticipation of a Trump victory, or potential legislation he might enact should he win. This has affected sentiment towards those stocks or sectors that are expected to be affected, positively or negatively.
Yields: The level of income on a security over a set period, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price.