Why do equity markets care so much about trade wars? Well, although trade can create winners and losers, as president Trump has opined, it has also been demonstrated that trade is, in the long run, a net benefit to the global economy.
European companies’ earnings and dividends are dependent on the health of the global economy. The imposition of trade barriers may, in the short term, secure the jobs of those protected, such as American steel workers, but often results in off-setting job losses elsewhere, for instance, in industries in which steel is a key input or in other geographies which export steel to America.
Investing memories are long and many have blamed the length of the Great Depression of the 1930s on the Smoot-Hawley tariffs imposed by the US on its trading partners nine months after the Wall Street crash of 1929. Remember, it took the Dow Jones index 25 years to get back to its pre-crash peak.
Trump has famously tweeted that it’s easy to win trade wars and has confidently predicted that the US will ‘win’ these trade wars. So which European companies will be the losers as protectionism escalates?
Some sectors will be hit particularly hard: the autos sector is one obvious casualty. Cars manufactured in Europe and exported to the US (think BMW, Mercedes, etc.) have a 2.5 per cent tariff added at the border while cars manufactured in the US and exported to Europe are marked up with a hefty 10 per cent tariff (yes, four times as much).
Now president Trump thinks that’s unfair and one of the reasons why Germany is running a massive current account surplus with the US. The president has mooted a 20 per cent tariff which would surely make American consumers think twice before buying their next German import?
To make matters worse, the German manufacturers are already getting caught in the cross-fire between the US and China, who have slapped a retaliatory additional 25 per cent tariff (to take it to a whopping 40 per cent in total) on cars manufactured in the US and exported to China.
BMW, for instance, manufacture SUVs in Spartanburg, South Carolina and ship them to China. All this bravado may die down in the longer term but, for companies with global supply chains like the auto OEMs, the uncertainty is already damaging (and we have not even broached the subject of a no-deal Brexit yet).
Are there any winners? Will any European companies benefit from trade wars? It is certainly easier to identify losers than winners.
Ultimately, the real winner may be Trump himself if his ‘America first’ credentials garner him more votes; recent polls suggest his approval ratings are rising again. To find out if it’s worked for Trump, we will probably have to wait until the next presidential election.
If it does, then we can look forward to four more years of market volatility assuming the ‘tweeting’ and trade wars rumble on. Maybe Deutsche Boerse would continue to be a strong performer? After all, volatility is a huge boost to derivative volumes on its Eurex exchange!
Sam Morse is portfolio manager of the Fidelity European Values investment trust. The views expressed above are his own and should not be taken as investment advice.