European espresso: post-Liberation Day tariff impacts on European equities
As part of our Espresso series, Portfolio Manager Tom Lemaigre considers how US President Trump’s tariff announcements are changing market dynamics for European equities, as investors seek to navigate through post-tariff uncertainty.
5 minute watch
Key takeaways:
- There has been so much volatility across equity and fixed income markets globally since US President Trump announced his tariffs, with both initial levies, subsequent changes, and the response from other countries, sustaining uncertainty.
- The Trump administration’s focus on imposing tariffs on Southeast Asian supply chains, with a particular focus on decoupling from China, has raised concerns about the impact for European companies with exposure to this area.
- We remain positive on European equities due to compelling valuations, political willingness for deregulation, and potential benefits from geopolitical changes (eg. Ukraine), despite market uncertainties caused by tariffs.
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. There is no guarantee that past trends will continue, or forecasts will be realised.
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.
OEM: Original Equipment Manufacturer – organisations that make devices from component parts purchased from other companies.
Tariff: A tax or duty imposed by a government on goods imported from other countries.
Volatility: The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility the higher the risk of the investment.
Well, what a wild time market participants have been living through recently, since Liberation Day, there’s just been so much volatility across equity and fixed income markets. In terms of what surprised us the most from what President Trump announced on 2nd April to say was probably the lack of extra tariffs on Canada and Mexico, as well as the lack of tariffs on pharmaceuticals and semiconductors.
On the former, we saw that actually in a good light and a positive light. On the latter, ie pharmaceuticals and semiconductors, I have to say, that somewhat surprised us, and we were slightly skeptical that tariffs wouldn’t be put on at a later date. We were proven right in that. But what’s come to light since Liberation Day is that the Trump administration is looking very closely at those two sectors under Section 232 in terms of how to add tariffs to specific industries and products.
Now, key other areas where we felt the need to act in light of what was announced, are in industries or companies that have a lot of their supply chain that finds itself in Southeast Asia. So in this regard, I would have thought people and investors should think about athleisure apparel companies where a lot of their production comes out of countries like Vietnam, Cambodia and Thailand, which were slapped with high tariffs. Now, obviously there’s now a 90-day pause on those but we do not know how those negotiations are going or how they’ll end up.
The other area of concern for us is the very clear decoupling that the Trump administration is trying to have with China, and so therefore we have to think very deeply about our China exposure across the various strategies that we run. Now it is clear that this tariff tennis and this uncertainty is going to continue, and unfortunately, that uncertainty will probably lead to a slowdown in economic growth as companies, corporates, executives, think about what to do in terms of their investment plans.
They are not sure. Markets do not like uncertainty. However, we remain positive on European equities for the very clear reason that actually the starting point from a valuation point of view, both relative to other markets and absolute terms, is very compelling. Secondly, we really do believe that with the external pressures that Europe is facing, both from the east and from the west, there is proper political change, or political willingness to change and deregulation coming to our shores, be it in the banking sector or automotive sector, as we’ve seen with a loosening of CO2 emissions rules in Europe for the auto OEMs. And the last thing is the peace dividend that might potentially come from Ukraine, and how that affects the continent, and therefore the equities which are traded within it. So therefore we remain bullish on European equities despite the market uncertainty that has been caused by these tariffs. But clearly the situation is ever changing every day, and we need to stay on top of it.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. 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.
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.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
Marketing Communication.
Important information
Please read the following important information regarding funds related to this article.
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
5 minute watch
Key takeaways:
- There has been so much volatility across equity and fixed income markets globally since US President Trump announced his tariffs, with both initial levies, subsequent changes, and the response from other countries, sustaining uncertainty.
- The Trump administration’s focus on imposing tariffs on Southeast Asian supply chains, with a particular focus on decoupling from China, has raised concerns about the impact for European companies with exposure to this area.
- We remain positive on European equities due to compelling valuations, political willingness for deregulation, and potential benefits from geopolitical changes (eg. Ukraine), despite market uncertainties caused by tariffs.