Investing.com -- UBS strategists see limited upside for European equities under a Trump presidency, chiefly due to concerns over potential trade tariffs, higher US bond yields, and a rollback of green energy policies.
These headwinds, according to strategists, may weigh on equity valuations within the bloc.
On trade tariffs, UBS notes that while around a quarter of European profits are generated in the US, "most goods sold in the US are produced locally rather than exported," which could cushion some European companies.
However, the investment bank warns that broad tariff threats and higher duties on Chinese imports could dampen global trade, a scenario that previously impacted European equities during the 2018-2019 US-China trade tensions.
“In 2018-19, European equities on average fell 7% during the three episodes of US-China trade escalation, with China-exposed cyclical sectors, such as materials and consumer discretionary, falling by more than 10% on average,” strategists led by Matthew Gilman wrote.
“We therefore view potential trade escalation as a negative risk for European equities,” they added.
UBS’s team also points to risks tied to green energy policies, with the potential rollback of certain Inflation Reduction Act (IRA) incentives potentially challenging European greentech industries.
Sectors such as utilities, industrials, and auto manufacturers – specifically in electric vehicles – may face headwinds if US green energy policies are scaled back.
UBS notes that while auto and utility stocks fell after Trump’s victory, European industrials showed resilience, likely reflecting expectations of increased defense spending and potential manufacturing shifts in response to trade tariffs.
Lastly, European defense spending is another key factor.
According to UBS, Trump's presidency could pressure European nations to expedite defense investments, particularly given uncertainties around sustained US support. This scenario is generally positive for Europe’s defense firms, which saw gains following the election.
Furthermore, UBS observes that a Trump-led US administration might facilitate a resolution in the Russia-Ukraine conflict, which could ease energy price volatility. A resolution would be beneficial for Europe’s manufacturing sectors, but it might introduce downside risks for utilities benefiting from high energy prices driven by geopolitical tensions.
In terms of sector positioning, UBS continues to favor consumer staples, IT, and utilities, despite recognizing potential challenges ahead. These sectors have already factored in some risk, and UBS believes their "fundamental drivers remain supportive."
For instance, recent results showed a recovery in consumer staples volume, and IT and utilities are seen as attractively valued with promising growth potential.