A potential ‘trade war’ between the US and EU could have a significant impact for European companies, according to Hermes Investment Management’s Tim Crockford.
US president Donald Trump’s decision to introduce tariffs on up to $60bn in Chinese imports has stoked concerns that he could turn his attention to Europe as he follows more protectionist policies.
“One of the big risks on everyone’s radar is an increase in the protectionist rhetoric we’re seeing, not just between the US and China but also between the US and Europe,” said Crockford, who manages the five FE crown-rated Hermes Europe ex UK Equity fund.
“Of course, Europe has its own issues close to home with the UK, but the worry we have is that we get measures put into place which stop trade.”
The threat of a trade war has become an increasing concern for fund managers, who see Trump’s policy towards China as a potential sign of things to come.
According to the latest Bank of America Merrill Lynch Fund Manager Survey, the threat of a trade war has re-emerged as the top tail risk among global fund managers.
Source: BofA ML Fund Manager Survey
Indeed, after emerging markets, managers expected Germany to be the most vulnerable to a trade war, as the above chart shows.
After the EU signalled it could consider retaliatory measures over any tariffs imposed on exports earlier this month, Trump responded with threats to tax car imports from Europe.
The US president wrote on Twitter: “If the EU wants to further increase their already massive tariffs and barriers on US companies doing business there, we will simply apply a Tax on their Cars which freely pour into the US. They make it impossible for our cars (and more) to sell there. Big trade imbalance!”
Although the US administration will initially shield a list of allies – including the EU – from new tariffs, any move could have big implications for Europe which has a significant trade surplus with the US.
Latest data from the European Commission shows Europe is the biggest beneficiary in bilateral trade with the US. While Europe imported US goods worth €246.8bn in 2016, trade in goods from the EU to the US was worth €362bn.
When it comes to countries, Germany is the biggest exporter to the US – with exports totalling €112.3bn in 2017 – followed by the UK, Italy, France and the Netherlands.
Despite growing concerns, Crockford said he remains optimistic in his outlook for Europe.
The Hermes manager said while the region’s economic cycle has lagged other major economies, it has recently picked up due to an improvement on the peripheral nations economic prospects and an upturn in global trade.
“The gradual improvement in the European economy was the result of a few things: first of all, it was the result of a general improvement on the outlook for the peripheral nations,” he explained.
“Secondly, we have seen a pickup in global trade, which is very positive for Europe given that it has a large amount of exports.”
International trade in goods of the euro area (€bn)
Source: Eurostat
Another reason to be optimist, Crockford said, is the recovery of corporate earnings, which have started to improve in some sectors.
“Ever since the credit crisis started in 2008, what you’ve seen is that European companies’ corporate earnings have actually on a market level still not got back up to the level where they were before, it is still a slow improvement,” he said.
“Those improvements vary depending on the sector, there are some sectors where you’ve seen a big improvement and others like financials for example, that are much further behind.
“But what you’ve seen now is that the earning recoveries in terms of corporate earnings, in particular, have certainly started to improve and broaden out,” the Hermes manager added.
Despite the growing concerns about the trade war, Crockford said he hasn’t made any changes to the portfolio as he said the fund isn’t exposed to companies in the sectors most affected by tariffs currently.
He also noted that because of his high conviction, bottom-up investment style, government policies haven’t seemed to affect the fund’s performance over the long term.
“Our investment approach doesn’t fit into the growth or value categories but aims to find mid-cap ideas that are exposed to elements of change and will grow into large caps,” he said.
“Because the focus is in companies that are really changing by serving these unique areas or big thematic plays, typically there hasn’t been a great deal of effect over the long run from government measures.”
But Crockford said there is one area in relation to a potential trade war that he is keeping an eye on and in which the fund has a significant exposure.
“We keep an eye on what Trump says about the pharmaceutical industry with regards to drug pricing, as there is no reason why dug pricing should be as high as it is.
“The companies I've talked with aren’t taking risk with regards to pricing. Additionally, what we’ve been adding in the healthcare space has been more directed towards life sciences rather than traditional big pharma,” Crockford noted.
The Hermes Europe Ex UK Equity fund was launched at the end of 2011 and targets capital growth through a portfolio of equities with a European bias, including Russia and Turkey. Crockford is lead manager of the €128.8m fund, with support from co-manager James Rutherford.
Performance of fund over three years
Source: FE Analytics
Over three years the fund has delivered a total return of 46.45 per cent, compared with a 28.88 per cent gain for the average IA Europe Excluding UK fund and a 26 per cent return for the FTSE World Europe ex UK benchmark index. The fund has an ongoing charges figure (OCF) of 0.94 per cent.