With Donald Trump taking office on 20 January, Premier Miton fund managers Carlos Moreno and Thomas Brown consider the potential impact on European firms.
How Trump’s proposals could impact the outlook
Although Donald Trump has made a host of promises, what will happen could be very different. Many of them are mere negotiating positions or impossible to deliver (or both). Here we consider the how some of his proposals might impact the outlook for European mid-caps.
What Trump’s immigration policy could mean for Europe
Trump has pledged to deport 15-20 million people from the United States who he says are undocumented. If we conservatively assume that these immigrants have a similar workforce participation rate to the wider population, then that could mean a 7.4% decline in the working population (a fall of 12-13 million).
Around a third of the Covid-era inflation has been attributed to labour factors by the US Bureau of Labour Statistics, and that only involved a sub-3% decline in the participation rate. So, Trump’s policy here could lead to a huge rise in inflation, and therefore US interest rates. This would hurt the US stock market and also the US budget deficit.
With respect to Europe, high US inflation could make Europe more competitive and therefore European mid-caps could benefit.
The other thing to consider with respect to immigration is demonstrated in analysis by economists at the University of Pennsylvania. In the paper The Wealth of Working Nations, they show that the main factor driving the relative growth rate of the US ahead of Europe and Japan in the last 40-odd years has been changes in population rather than change in GDP per capita. According to their data, whereas the GDP growth premium of the US over Germany was 0.96% per annum, when compared on a per capita basis, the premium dropped to just 0.14%, and on a per working-age adult basis it fell even further to just 0.09%.
Therefore, if the US cuts population growth by curtailing immigration, growth rates vs the rest of the developed world might also be expected to converge which, given the relative starting valuations, would likely be bad for US assets and good for European assets.
US labour force participation rate %
Source: US Bureau of Labour Statistics, Bloomberg, 31.12.2004 - 30.11.2024.
US civilian total labour force (thousands)
Source: US Bureau of Labour Statistics, Bloomberg, 31.12.2004 – 30.11.2024.
What tariffs and trade wars could mean for Europe
It has been widely agreed that it was American consumers and businesses that bore the vast majority of the brunt of Trump’s tariffs during his first presidential term, with them acting as a tax on Americans and reducing output.
President-elect Trump has suggested he’ll be implementing tariffs on a much greater scale than last time, which can’t be good for the US, in our view.
Consensus seems to be that this will be a disaster for Europe, too. However, with the majority of Trump vitriol reserved for the Chinese, if those two nations get into a tit-for-tat tariff war, Europe might actually be left relatively less impacted to its relative benefit.
The World Bank calculates global trade as a proportion of total world GDP. The data show that world trade peaked in 2008 and was on a downward trend until recently. However, this decline was barely mentioned by economists in the decade after the financial crisis, nor was its recent recovery. We think this chart shows that we have lived with deglobalisation in the last 15 years, and we can therefore probably deal with it again. Perhaps the hysterical doom mongering found in current economic commentary will prove to provide a fantastic buying opportunity for all the supposed losers from the expected trade war.
World Bank total trade – goods/services as a % of GDP
Source: World Bank, Bloomberg, 31.12.1970 - 31.12.2023.
Peace in Ukraine?
Trump has said that he will push for a negotiated settlement in the Russia-Ukraine conflict on “day one”. The following chart shows the German gas price over the last 5 years. One might be forgiven for concluding from this chart that the disruption from the shutting of the Nordstream pipeline is behind us and Europe has returned to normal, but this is wrong. The price has fallen due, in part, to the collapse of demand driven by mass European deindustrialisation that took place after the Russian invasion of Ukraine (to the benefit of the US).
Suppose Trump were to push for a peace deal between Russia and Ukraine. What next? Well, it is unlikely that Europe could return wholesale to the status quo ante and benefit from cheap Russian gas, though at the margins supply will increase and energy prices will fall, which has to be a positive.
On the other hand, should European governments feel the need to continue the Russian war without the US, this is likely to be expensive. Then again, Ukraine certainly won’t be buying US arms anymore, so this will be negative at the margin for US growth, as the majority of US military aid to Ukraine has been spent on purchasing arms and equipment from American sources, boosting US growth. It could, therefore, potentially be positive for European growth, but bad for budget deficits. With the German 10-year bond yielding more than 200 basis points less than that of the US, one wonders how much the markets would worry about increasing deficits stimulating European growth.
German gas price
Source: Bloomberg, 1 month forward German gas price 18.12.19 - 16.12.24. Past performance is not a reliable indicator of future returns.
The outlook for European mid-caps: in conclusion
To reiterate, we have no idea which of Trump’s promises will be broken and which will be kept, so claiming a high degree of conviction in any forecast of what will actually happen would be extraordinarily foolish.
However, considering the range of possible outcomes, the worst-case outcome for Europe doesn’t seem disastrous. And some of Trump’s policies appear to be clearly detrimental to the US and therefore potentially incrementally positive for Europe on a relative basis.
Current investor sentiment, positioning, and relative valuations seem to imply that Trump is entirely positive for the US and entirely negative for Europe, which seems to be an unlikely outcome.
One thing that seems reasonably likely under most outcomes is a further divergence in rates, which in isolation supports European stocks over US stocks, and small/mid-caps over large. Clearly there are other factors to consider, so this analysis should not be taken in isolation.
Carlos Moreno and Thomas Brown
Fund Managers, Premier Miton European Opportunities Fund