European espresso: Europe can adapt to any US election outcome

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.