The tariff threat, announced on Trump’s Truth Social account over the weekend, comes at a time when investors had been gradually warming to Europe as an investment destination, amid expectations that US–China trade frictions would leave Europe relatively insulated.
But investment firms say while the tariff move would deal a substantial blow to the European economy, it may be cushioned by loosening financial conditions and incoming fiscal support.
Russell Investments senior investment strategist Alex Cousley said although tariffs have dragged on global growth, the impact so far has largely been offset by a rally in equities, tighter credit spreads and steady rates.
“As equities have rallied and credit spreads have come in, we’ve seen rates steady,” Cousley said.
“We still expect global growth to slow from here and recession risks are a little bit above normal but have come down from the Liberation Day peaks.”
Cousley said in the past week sentiment has moved closer to neutral territory following the recent rally.
“We track sentiment very closely and sentiment was still oversold for US markets and even European markets just a week or two ago, even after the rally so there was a real hesitancy within that. We were rallying but no one felt super confident about that,” he said.
“We’ve now reached a point where [sentiment] is close to neutral.”
While few fund managers are taking an aggressive equity position right now, the investment firm is taking the approach of buying incremental equities rather than selling on concerns that the global economy is going to peter out, Cousley explained.
“Following Liberation Day, we were pretty aggressive in buying equities but we’ve been selling over the last two months. We’re now pretty close to where we were before Liberation Day,” he said.
“From here, if we see volatility pick up and markets start to get into a panic, we would look to buy more. Conversely, if markets keep rallying from here, we’ll likely continue decreasing our exposure to risk.”
Looking specifically to Europe, Cousley said there are many offsetting factors at the moment.
“In Europe, you have a lot of fiscal spending that going to hit the tape in the next 12 to 18 months. Bank lending has been pretty solid and so those things will be able to provide an offset from the hit from tariffs,” he said.
“It’s not the worst outcome for the European economy and European markets.”
Betashares chief economist David Bassanese said if many of these tariff announcements do proceed, most countries will be in a similar situation and therefore won’t lose competitiveness against other countries.
“The US also has low capacity for import replacement because its economy it’s close to full employment,” he said.
Bassanese said it was also unlikely that US businesses would start up import replacement businesses based on tariffs that might only last a few years.
Many countries are moving slowly on trade deals and there is also a sense that President Trump may not follow through with his threats, he noted.
“If he does proceed with the 30 to 50 per cent tariffs announced for many countries, then US inflation will go up for several months and it will be a hit to US economy,” Bassanese said.
“Markets are still dubious about whether he’s prepared to go through with that or not.”
