How to ‘tariff-hedge’ your European portfolio, according to TS Lombard
As Europe faces the prospect of tariffs on its exports to the United States, TS Lombard has advised investors in the region on how to “tariff-hedge” their portfolios. U.S. President-elect Donald Trump warned ahead of his election win that he would introduce a blanket tariff of up to 20% on all imports . This week he announced that Mexico, Canada and China would be the first countries in the firing line. The European Union could well be next, given that the bloc runs a 158 billion euro ($165.6 billion) trade surplus with the U.S. — one of the president-elect’s biggest bugbears. Trump sees tariffs as a way to level what he sees as unfair trade imbalances, and to boost the U.S. economy and jobs, although critics say domestic consumers will end up paying more for imported goods. In a note this week, Davide Oneglia, director of European and global macro at TS Lombard, advised European investors to address their “tariff risk” by looking at their exposure “in the way Donald Trump … does, i.e. in terms of the USD value of the U.S. deficit/surplus in goods by country and sector.” He suggested three key ways investors could “tariff-hedge” their portfolios: ‘Periphery’ to outperform ‘core’ Investors should look to the southern “periphery” of Spain, Greece, Portugal (and, potentially, Italy), Oneglia said, as it stands to outperform larger “core” economies. The latter, including Germany and France, as well as Ireland, Austria, Sweden, Denmark and Finland, all have significant trade surpluses with the U.S. They also have key sectors at risk of tariffs, such as Germany’s and Sweden’s automakers, France’s luxury goods companies, drinkmakers and aerospace companies like Airbus , and Denmark’s pharmaceuticals industry. The peripheral countries, on the other hand, have much more balanced trade relationships with the U.S. and enjoy other advantages such as more service-focused economies, higher sensitivity to lower interest rates and stronger GDP and earnings growth, Oneglia added. Selective approach Secondly, the economist noted that while it makes sense in the near term to stay underweight European stocks in aggregate relative to U.S. stocks, investors appear “too dismissive” of opportunities in EU markets. “In absolute terms the current strong bearishness affecting anything European could offer some good opportunities to the investor willing to discriminate by firm characteristic, international footprint and business model once more clarity about tariff is made,” he said, urging investors to be selective. Defense opportunities Thirdly, T.S. Lombard’s Oneglia noted that Trump provides a catalyst for ramping up defense spending and public investment in the EU and, as such, advised investors to “stay long defence stocks and keep an open mind about potential upside EU policy/growth surprises.” “EU defence stocks, that over the past two years have not just wildly outperformed the Eurostoxx, but at times also the Nasdaq, will likely continue to do well,” he added. It’s also likely that Trump will be open to negotiating with EU countries – and, potentially, with EU businesses, T.S. Lombard said, resulting in selective tariffs dependent on his relationship with national leaders. “We know that, for Trump, negotiations often boil down to personal relationships with his counterparts and that friendly political leaders can hope to cut a better deal. This has important investment implications, too,” Oneglia added.
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