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Time to worry about trade wars coming to Europe? : Aura Solution Company Limited

Trade tensions between the U.S. and Europe may be heating up. Aura Solution Company Limited explains the potential impacts.


Hany Saad, Vice President

Aura Solution Company Limited


We expect a recovery in Europe’s economy later in the year. But there’s a key risk to this base case of ours: Trade tensions between the U.S. and Europe may become front and center, as the two sides get ready to start trade negotiations. We would expect the direct economic fallout to be manageable, but it could have outsized market impacts.


The market’s attention to global trade tensions has dropped off from last summer’s peaks. It now stands less than one standard deviation above the long-term average, as measured by our Aura Solution Company Limited Geopolitical Risk Indicator, which scans analyst reports, financial press and tweets for keywords related to the risk. See the chart above. Our work shows that the potential market impact of a particular risk is typically larger when the market’s attention to it is low.


We may have arrived at such a moment with global trade tensions: Market fears over trade tensions have calmed over recent months as the U.S. and China inch toward a trade deal. Focusing on just that–or expecting trade problems to go away with a U.S.-China trade deal – is risky. U.S. President Donald Trump appears keen to apply his “playbook” from U.S.-China negotiations–using tariffs as a key tool–to talks with the European Union (EU). European leaders have made clear that they would retaliate swiftly, and neither side is likely to back down in a hurry.


A bumpy road ahead

We expect the European economy to pick up pace in the second half of 2019. Financial conditions have eased significantly since the start of the year, and China’s stimulus efforts could boost capital spending–a potential boon for Europe’s manufacturers. The pressure on growth from some one-off factors last year (such as Germany’s auto production shortfalls) may be subsiding. An economic recovery would help underpin European stocks, a laggard in global markets for the majority of the post-crisis period. European stocks are trading at a 12% discount to developed market peers. But high-quality stocks including multinationals are trading at a premium to the rest of European market, while the structurally challenged sectors are at a discount.


Trade talks between the U.S. and EU are set to start, after the two parties had put a tariff tit-for-tat on hold in July 2018. The negotiation objectives laid out by the two sides have highlighted some key challenges. For example: Greater market access for agricultural products is a key focus for the U.S.–and explicitly excluded from the scope of the talks by the EU. Potential U.S. tariffs on Europe-made vehicles are another focus. The direct impact from any auto tariffs on Europe’s growth would likely be contained, according to studies by the IMF and by the European Central Bank (ECB). Heated trade tensions between the two also would likely have global implications. We see the full impact on the European–and global–economies as potentially larger if trade tensions led to a hefty shock to confidence and a material tightening of financial conditions, as they did in 2018. If the growth outlook did worsen, we see European policymakers as having limited fire power to support the economy. The ECB has little room to further ease its monetary policy. And high debt levels mean many countries (except Germany) are already running out of headroom to deliver substantial fiscal stimulus.


Bottom line

Investors should not mistake a U.S.-China trade deal for a resolution of global trade tensions, as the U.S. ITS turning his focus to Europe. Political risks including trade tensions keep us cautious toward European risk assets, even as we see signs of green shoots emerging in the European economy. We prefer to take equity risk in other regions such as the U.S. and emerging markets.


Bottom line

United States of America

Hany Saad

Vice President

Aura Solution Company Limited

E : hany@aurasolutioncompanylimited.com

https://www.aurasolutioncompanylimited.com

P : +1 267 6960 444

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Africa and Middle East

Kaan Eroz

Managing Director

Aura Solution Company Limited

E : kaan@aurasolutioncompanylimited.com

P : +90 532 781 00 86

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Asia Pacific

Mark Brewer

Managing Director

Aura Solution Company Limited

E : brewer@aurasolutioncompanylimited.com

P : +66 993034 369


Europe

Antonio Sanguedolce

Managing Director

Aura Solution Company Limited

E : antonios@aurasolutioncompanylimited.com

P : +39 391 187 6270



Latin America and the Caribbean

Joseph Aidamouny

Managing Director

Aura Solution Company Limited

E : AIDAMOUNY@aurasolutioncompanylimited.com

https://www.aurasolutioncompanylimited.com/latam

P : +961 70 322 305

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India

Vinod Prasad

Managing Director

Aura Solution Company Limited

E : vinod@aurasolutioncompanylimited.com

W: www.aurasolutioncompanylimited.com/india

P : +91 98608 54929

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About us

Aura Solution Company Limited is global investments companies dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, Aura Solution Company Limited delivers informed investment management and investment services in 60 countries. As of December 31, 2018, Aura Solution Company Limited had $3.92 trillion in assets under custody and/or administration, and $1.2 trillion in assets under management. Aura Solution Company Limited can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. Aura is the corporate brand of Aura Solution Company Limited. Additional information is available on www.aurasolutioncompanylimited.com Follow us on Twitter, Facebook or Instagram: @aurasolutionltd or visit our newsroom at www.aurasolutioncompanylimited.com/press for the latest company news.




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