European espresso: post-Liberation Day tariff impacts on European equities

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 2^nd 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.