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Laurent Denize – Global Co-CIO ODDO BHF

Even if the protagonists are already known, the rematch between Joe Biden and Donald Trump will once again captivate the world until 5 November The two candidates are neck and neck in the opinion polls and there is no clear favorite now In geopolitical terms, such as support for Ukraine or the future of NATO, a second Trump presidency could have some consequences Although recent history suggests that geopolitical noise typically had little lasting impact on markets, at least in the developed world, as policy and the business cycle prevail, the specter of Trump Season 2 could have a greater impact on investor sentiment in the coming months

This is because his team is better prepared than during his first term: many economic plans, such as tax cuts or higher tariffs, are waiting to be put in place. But whether they can be implemented depends on the economic situation. This offers less fiscal leeway than in 2016 at the start of Trump's first term. The national debt has continued to rise, the budget deficit has widened, while global growth is lower, and inflation is higher. Meanwhile, both consumer confidence and PMIs have weakened, and bank lending conditions have tightened. Only unemployment has fallen in the last four years. 

What does it mean for Europe?

We would like to illustrate the consequences that the Trump-Biden choice could have for Europe by looking at four areas of action for a US administration: trade policy (tariffs), fiscal policy (tax cuts), climate (Inflation Reduction Act) and security (NATO membership).

1) On the economic front, trade policy has been at the heart of Trump's first term and has the potential to shape a possible second term. If re-elected, he is considering a minimum tariff of 10% on imports from all countries and 60% on Chinese imports. Will this lead to a new trade war not only with China but also with the EU? While it is hard to assess the extent to which such high-level proposals would be realized, the consequences could be huge, but for both sides. That is because the US is the EU's biggest export market, with a share of just under 20 per cent; conversely, the EU is also the US's biggest export market, with a share of 18 per cent, ahead of China. This mutual dependence should make compromise possible, even if the threat of higher tariffs on EU and China imports could hurt sentiment towards European, German, and Chinese equities. Under a Biden 2.0 scenario, trade escalation risks would be avoided.

2) For Donald Trump, his major tax reform is one of the undeniable successes of his first term in office, as he believes it has strengthened the US as an investment location. The federal corporate tax rate fell from 35 per cent to 21 per cent. However, local surcharges are added depending on the state, so the final rate is higher.  While Biden wants to raise the federal tax rate to at least 28 per cent, Trump can imagine lowering it to 15 per cent. More fiscal expansion under a Trump administration may play on the bond market nerves but could boost US earnings expectations and sentiment towards consumer plays, Small Caps and Financials. Biden's higher taxes would be detrimental to European companies with a strong presence in the US. 

3) In terms of climate policy, the switch from Trump to Biden was like a tidal shift. The misleadingly named protectionist US Inflation Reduction Act more than doubled investment in clean technologies. EU companies were also involved, at 17 per cent, encouraged by attractive tax write-offs. In 2023 EU clean technology manufacturers announced USD 12 bn additional investments in the US. If Trump completely reverses this policy (which is far from certain, as Republican states also benefit), sentiment on the renewables/green energy/ESG space may take a hit, in our view. However, our call is that Europe could slightly benefit as IRA led to investment leakage to the US due to its easy-to-handle tax credits. If the Biden policy continues, the pressure of competition and relocation will remain.

4) In terms of defence policy, even without the extreme scenario of a US withdrawal from NATO, the EU is likely to increasingly use of industrial policy to scale up its undersized defence industry, although the urgency would be less if Biden were to win the election. The combined defence spending of all European NATO members is expected to amount to 2% of their 2024 GDP. The increase in EU military spending could alter countries' fiscal profiles and benefit equity sectors like Defense/Industrials.

How should investors prepare for Trump season 2? 

Most observers expect less disruption if Biden wins than if Trump makes a comeback. If history is any guide, though, the 2016 election, which was unexpectedly won by Trump, saw a strong and broad-based risk-on market reaction in the immediate aftermath. Oil, US small caps, EU equities, dollar and rates went up the most. However, this favorable picture for investors cannot be applied to his entire term in office. Trade policy has been a source of disruption, particularly in European industries hit by punitive tariffs, such as the automotive sector. To that extent, European Equities weakness became evident during the heightened trade uncertainty period of January-September 2018. Energy, Luxury Goods and Retail were the only outperformers with positive absolute performance.

What could be the impacts if Trump is elected for a second term?

• Macroeconomics: As regards growth, the impact should be slightly positive, but the initial “sugar high” effect could be dampened by imported inflation. As regards inflation, the release of Trump Season 2 would be rather a reflationary call for the US. Nevertheless, the stimulus would need to be big to affect European inflation and growth. As regards rates, our call would be an increasing pressure on the central bank, resulting in looser monetary policy and a steeper yield curve.

• Asset classes: A Trump election should support the US dollar, energy stocks, US equities, US Credit, domestic Cyclicals, and should be mostly positive for Small Caps. On the flip side, EU/German/Chinese equities may be seen as the losers. Nevertheless, the impact on European equities and bonds is more nuanced as “Trump risk” is more idiosyncratic than broad-based. Although 25% of the sales of companies in the MSCI Europe come from the US, only 6.4% relate to goods exported to the US (i.e. potentially subject to incremental US tariffs)

• Sectors: Taken individually, there are only a few sectors where targeted tariffs could meaningfully affect Europe on a macro scale.  As in the first term, the automotive industry is most at risk of falling victim to a trade war, given that import tariffs in the EU are higher than in the US. A 10-point increase in tariffs would drive a 20% volume decline in EU-US exports for all exposed EU car manufacturers. The luxury goods industry, which generates 20% of its sales in the US, would also suffer from higher tariffs as its pricing power has been eroded by inflation. Retaliation against EU countries with a digital services tax aimed mainly at US companies and export restrictions on security-related technologies could hit high-tech companies from key European countries (France, Italy, Spain mainly). Finally, targeted tariffs on medical technology and pharmaceuticals are also a possibility.
Broadly, as we get closer to November 2024, we expect the volatility of European sectors and stocks directly exposed to potential policy changes to rise and divergences in performance to widen. Thus, idiosyncratic risks in these sectors must be monitored in the run-up to the election, as their share prices may react to poll numbers and campaign rhetoric. That is why we stay tuned for teasers and trailers announcing Trump Season 2!

Disclaimer

This document has been prepared by ODDO BHF for information purposes only. It does not create any obligations on the part of ODDO BHF. The opinions expressed in this document correspond to the market expectations of ODDO BHF at the time of publication. They may change according to market conditions and ODDO BHF cannot be held contractually responsible for them. Any references to single stocks have been included for illustrative purposes only. Before investing in any asset class, it is strongly recommended that potential investors make detailed enquiries about the risks to which these asset classes are exposed, in particular the risk of capital loss. 

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