Europe’s Red Tape May Prove to be Strength in Trump Tariff Talks
According to global fund managers, Europe’s bureaucratic processes and red tape may prove to be its greatest asset amid turbulent tariff tantrums. Lewis Grant, senior portfolio manager for global equities at Federated Hermes, told FT Adviser: “Amid persistent policy uncertainty, stability and predictability in bureaucratic processes is suddenly seen as attractive.”
Grant also stated that Europe’s slow-moving institutions and strong governance have made it an attractive destination for capital. He said: “Europe has often been viewed as slow moving, held back by its own red tape: this is now arguably its strongest asset. Capital is flowing towards Europe, buoyed by confidence in strong institutions, governance, and equity markets which typically trade at discounts relative to their US counterparts.”
The comments come as the US and Europe engage in tense trade talks, with the US imposing tariffs on European imports. According to Irene Lauro, European economist at Schroders, countries like Germany and Ireland are likely to see the largest impact on growth if no deal with the US is reached. She told FT Adviser: “Countries like Germany and Ireland are going to see the largest impact on growth if no deal with the US is reached. This is because they are the ones that have the largest trade surplus in goods with the US.”
The impact of the US tariffs has left global investors facing a new reality, with US exceptionalism no longer the narrative. Grant noted that the Federated Hermes team did not predict the US would be dethroned as the world’s major economy, but Europe’s stability and slow-moving institutions offer confidence, and in this market, that is a draw for capital.
The narrative is strengthened by the attractive relative valuations of European stocks. In quarter four last year, according to Morningstar, European stocks were trading at a 5 per cent discount to fair value estimates. However, over recent weeks, the tariff tantrum has caused the UK equity market to trade at a discount of nearly 50 per cent to the US benchmark, and the MSCI Europe ex-UK index at a discount of over 35 per cent, according to JP Morgan.
Grant added that the reasons for this discount should not be ignored: Europe’s stagnant growth over the past decade justifies its much-derided discount. However, should its economy prove resilient when others are not, he anticipates a general multiple expansion driven by capital inflows and easier, cheaper access to capital to fuel growth. He said: “Europe is the ‘stability for cheap’ play, and we expect global investors to continue to fund European markets for as long as that holds.”
JP Morgan analysts noted that although tariffs on EU imports have been suspended for 90 days, countermeasures could still be imposed on the US if a trade deal is not agreed. Currently, Ursula von der Leyen, President of the European Commission, is in discussions with world and regional leaders about a response to the tariffs. JP Morgan said: “Europe’s trade-heavy economies will nonetheless be affected by restrictions on global trade, particularly if the EU is forced to follow the US and impose restrictions on Chinese imports to protect its industries from excess Chinese supply.”
They also commented that a mitigating factor that investors may be underestimating is the response of European policymakers. They are confident the European Central Bank will continue on an easing path, since Trump’s policies could reignite inflation in the US but dampen inflationary pressures within continental Europe as the European growth outlook faces tariff-related risks. Lower interest rates could incentivise consumers to spend some of the savings accumulated during the pandemic.
Lauro warned that stock selectors and allocators should look more closely at the EU. She agreed that another ECB rate cut is likely in June, as the shock to business confidence, trade and investment has increased the downside risks to activity. She added: “We also have to consider the secondary effects, such as on business and consumer confidence. The tariffs are already having an impact on consumer confidence; holding back on consumption and investment looks increasingly likely.”
This article was originally published by FT Adviser. For more information, please visit their website.
The information provided in this article is for general information purposes only and should not be considered as investment advice. It is recommended that you consult with a financial advisor before making any investment decisions.
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