Trump’s unpredictability supports European equity markets

Tariff is Trump’s favourite word. So far, he has put tariffs on products from the US’ most important trade partners: Canada, Mexico and China, and now Europe. Meanwhile, he has repeatedly introduced tariffs only to cancel or significantly alter them shortly after: a tariff yo-yo. In doing so, he fosters an unpredictable business climate which causes consumers and companies to delay their investments. Trump’s tariffs and trade wars have hurt the US stock market pushing US stock markets into correction territory.

Despite the tariff turmoil, the US economy is demonstrating resilience. During this earnings season, US corporations demonstrated their ability to generate healthy profit margins. Additionally, the labour market remains strong with unemployment stable at around 4%. The pressure on US stocks is mostly found in the more expensive IT sector. We judge this more as a correction than the start of a bear market. The underlying investment case remains solid, and therefore, we are content with a neutral positioning on US equities.

European equity markets have had a strong start to the year, outperforming their US peers. While European economic growth has lagged in recent years it is starting to recover. And now, the escalating trade war and Trump’s rhetoric with respect to Ukraine appears to have awakened European politicians to the reality that Europe has been too dependent on the US.

In preparing Europe for a world without US military aid, the European Commission (EC) President Ursula von der Leyen recently proposed the ‘ReArm Europe’ p lan which could mobilise EUR 800 billion on defence spending. Moreover, Germany’s chancellor-in-waiting, Friedrich Merz, is now spearheading plans to significantly boost German defence and infrastructure spending. And investors have reacted well to this European pivot in fiscal policy. The rationale behind this movement is that the European spending plans are expected to stimulate the economy and potentially create a path towards long-term growth. Hence, by alienating Europe, Trump is unintentionally making Europe great again. Still, these are only proposals and there remains a lot of uncertainty. As a result, we maintain our neutral positioning on European equities.

Also, the European bond markets have been impacted by Merz’ spending plan. In Europe, we saw a strong rise in especially German bond yields resulting in a tightened treasury/bund spread. Although this has hurt European bond prices in the short term, we believe yields will go lower from here.

While ABN AMRO Group Economics no longer expects any rate cuts from the Fed this year, we do expect the ECB to continue with rate cuts. US inflation remains elevated and additional Trump tariffs could lead to a further uptick. Furthermore, for Europe, an escalating trade war could be beneficial for bonds since it is likely to cause yields to fall. Therefore, we currently see more upward potential in European bonds that benefit from declining interest rates.

Finally, credit spreads remain at low levels which makes higher yielding bonds like high yield and emerging market debt too expensive in our view. Thus, we remain cautious on riskier bonds.

Equity markets have been more volatile as of late, with European equities outperforming their US counterparts. However, the fundamental investment case for the US remains strong while Europe is recovering and shifting towards global competitiveness. Furthermore, we expect European yields to drop faster than their US counterpart in the coming period and are therefore more positive on European duration.

There is a lot of uncertainty in the market, but ABN AMRO Investment Committee remains comfortable with the current asset allocation. It has made no changes and remains slightly overweight equities and bonds and underweight cash in the portfolio.

Erik Joly
Chief Investment Officer