The scariest place for investors in a trade war

Many investors have already started to sell Europe, fearing that trade tensions will jeopardize an already fragile economic recovery in an area highly exposed to international trade. In recent weeks, investors have withdrawn billions of dollars of European funds of stocks and bonds. The export-intensive sectors have been wrinkled, with the region's auto inventories falling by 11% over the past month – now at less than 1% of a bear market Stoxx Europe 600 index fell 3.3%.

Europe is exposed to a range of direct and indirect business costs, investors say. The United States has already imposed tariffs on steel and aluminum in Europe and investors are worried that it will be the same for cars, the essential engine of the German export engine. .

Although Europe can avoid direct tariffs, the global supply chains on which its companies rely for their components could be affected while the US and China target their respective products.

Exports of goods and services account for 27% of euro area gross domestic product, compared with 12% for the United States and 21% for China, according to data from the European Central Bank.

If China and the United States enter a trade war, any effect on their economies will be felt in Europe. Both are the main export markets of Europe.

"Europe is very sensitive to trade and the global economy," said Thomas Costerg, economist at Pictet Wealth Management, adding that "Europe is still caught in the crossfire" and that It is still suffering from global growth.

What appeared to be a US trade program focused on China has already resulted in a direct confrontation with Europe. After the Trump administration imposed tariffs on metals in Europe and elsewhere, the EU responded by imposing tariffs on many US products such as Harley-Davidson motorcycles and bourbon.

For investors, an unexpected warning about the profits of Daimler AG last week has really highlighted the direct risks for Europe. The German automaker said that Chinese tariffs on vehicles built in the United States in retaliation would hit sales and profits. The European automotive sector fell for seven consecutive sessions until Monday.

"We think the warning of Daimler […] is a line in the sand, "said

Barbara Reinhard,

responsible for asset allocation at Voya Investment Management. Initial trade tensions were more concentrated in the narrow markets of the US market, but automobiles are much more global in nature and would probably hit Europe harder, she said.

So far in June, shares of Italian-American Fiat-Chrysler Automobiles, which generates 53% of its US business revenue according to FactSet, have fallen by 15%, while

Volkswagen
AG

and

Bayerische Motoren Werke
AG

have each lost 8.7%. The automotive sector accounts for 14% of the German benchmark DAX index.

Bank of America Merrill Lynch estimates that US auto tariffs at 25% could reduce euro area GDP by at least 0.3%, excluding any side-effects on investor confidence, corporate spending and changes in other export markets.

But it's not just European cars that have close ties to the United States and China. These two countries together account for 24% of the Stoxx Europe 600 business figure according to FactSet, which means that the index is exposed to slowdowns in their economies.

Investors are betting that this could hurt the profits of companies in the region. Fund managers withdrew about $ 17 billion from European stocks in May and June and $ 8 billion from European bond funds, according to data from the Institute of International Finance and EPFR Global. US assets now account for 58% of global fund portfolios – the highest since before the 2016 presidential election, according to data from the IIF.

"Much of the success of the European recovery is driven by strong export performance, particularly from Germany," said Chris Iggo, fixed income investment manager at AXA Investment. managers.

"In Europe, we could expect some kind of rebound [economic] the activity, but this might not materialize if companies worry about the commercial side and what this entails for investment and employment plans, he declares.

Already, there are signs that commercial uncertainty is slipping into economic data. June's euro-zone manufacturing purchasing managers index fell for the export-dependent manufacturing sector, from 55.5 in May to 55, its lowest level in 18 months.

While expectations of growth and monetary policy diverge, the yield gap between German and US 10-year government bonds last week reached its highest level since March 1989, according to data from the US. Tradeweb and Thomson Reuters.

To be sure, if commercial beards remain squarely between the US and elsewhere, some investors see opportunities for Europe to benefit.

If the EU adopts a relatively neutral stance and remains free of punitive tariffs from both the US and China, the Member States could benefit from the substitution of the two countries for their markets. respective exports, according to

Alicia Garcia Herrero,

chief economist for the Asia-Pacific to

Natixis
.

Exporters of automobiles and chemicals in particular could benefit, she said.

But many investors are worried that trade problems will come at a time when frantic regional policies are making Europe more vulnerable and less able to unite in its response to increased trade tensions. .

Simon Derrick, chief currency strategist at BNY Mellon, points out Germany's increasingly delicate coalition government, the potential clashes between the new anti-establishment government of Brussels and that of Italy and current debates around Brexit.

"All of this points to a much more fragile Europe," he said.

Write to Riva Gold at [email protected]