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May 17, 2019

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What’s at stake for Europe Inc in a trade spat with Washington when growth stalls

Source: Agencies | 00:05 UTC+8 May 17, 2019 | Print Edition

Europe’s listed companies are expected to generate 1.2 trillion euros (US1.35 trillion) in revenue from the United States this year, highlighting what’s at stake as global trade tensions grow and earnings and economic growth stall.

Analysts and investors say that based on revenues, European companies are more vulnerable to a dispute than their competitors in the United States.

US President Donald Trump is due to decide by Saturday whether to impose duties on car imports, potentially posing another significant threat to global growth and denting Europe’s prized auto sector.

Washington’s renewed tensions with Beijing may distract Trump and delay a decision beyond the May 18 deadline, or he may crank up his protectionist push with a global trade war on two fronts.

Last month, he also threatened to impose tariffs on hundreds of European goods, from cheese to ski suits, worth US$11 billion.

The impact on Europe’s top firms could be profound — with slowing economic growth and some countries like Italy struggling with bulging budget deficits, the region may not be as resilient to a prolonged dispute as China has so far proven.

In the past six months, the Chinese government has launched stimulus measures from tax cuts to boosting lending to shore up the world’s No. 2 economy as the trade spat rumbles on.

“I’m much more concerned about trade for Europe than I am for China,” said Christophe Donay, head of asset allocation at Pictet Wealth Management.

According to Europe’s top asset manager Amundi Asset Management, US sales average about 20 percent of MSCI Europe companies’ aggregate turnover, while European sales average about 14 percent of turnover for companies in MSCI’s US share index.

Typically, Europe’s carmakers are considered particularly vulnerable to Trump’s protectionism.

A 25 percent tariff could result in a 0.2-0.3 percentage points loss of export revenue and GDP for Germany, according to an analysis by Moody’s. The United States accounts for 13 percent of Germany’s car exports, the ratings agency has said.

Measured by revenue, there’s a lot at stake for companies like Fiat Chrysler with US$45.3 billion in US revenues. But many, like Fiat, have their own US production plants, sheltering them slightly from any outright tariffs.

Caroline Simmons, deputy head of the UK investment office of UBS Global Wealth Management, said she would expect the technology, energy and industrial sectors to be worst-hit by any further antagonism.

Average European company exposure to the United States in those sectors ranges from 10 to 20 percent in terms of sales, compared with 33 percent for health care.

UBS is underweight consumer discretionary in the euro zone, which includes autos, partly because of the trade tariffs.

“The market is nervous about it and last year (the US-China spat) escalated more than people expected and the effect on the market was bigger than people had anticipated,” she said.

Of pan-European STOXX 600 index companies, those in health care have the highest revenue exposure on average.

An analysis by Refinitiv based on companies’ estimates of 2019 revenue shows they draw some 133.3 billion euros in revenue from the world’s No. 1 economy and top drug market.

While health care has not been implicated in the tit-for-tat between Washington and Brussels so far, some investors worry about the potential fall-out from souring relations between the two economic powerhouses.

“As these sectors are in normal times regarded as defensive, they may doubly disappoint if the US and Europe also engage in a tariff war,” said Ibra Wane, equity strategist at Amundi, in a note this week.

The European health care index has risen 8 percent since the late December low, underperforming most other industries and lagging behind an 11 percent rise in the benchmark STOXX 600.

Pharma and medical equipment companies from BTG to BB Biotech and Fresenius Medical Care are among the most exposed individual companies, with 67-90 percent of total sales derived from the US.

Capital goods companies Ashtead and Ferguson are also high up on the list, with more than 80 percent of their sales made to the United States.

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