The potential impact on the U.S. and China from the continuing trade war is relatively clear: slower economic growth, higher inflation, and a hit to corporate earnings.
But it also affects the European Union, which as a bloc is close behind the U.S. in gross domestic product and well ahead of China. And whether a compromise is reached quickly or not, Europe stands to lose.
Investors, however, can take steps to prepare by buying stocks of domestically-focused sectors and selling those more vulnerable to the global economy, according to Société Générale .
“One of our takeaways from our visit to North America last week was that we’re now confronted with tweet-driven markets, making our strategies more vulnerable than in past cycles and certainly complicating our lives,” wrote Alain Bokobza, head of global asset allocation at Société Générale, in a report on Wednesday.
The STOXX Europe 600 index of large European companies has slipped 3.3% since May 5, when President Donald Trump first tweeted his intention to raise tariffs, versus a 3.5% decline for the Dow Jones Industrial Average and a 3.7% drop for the S&P 500.
Trade relations between the world’s two largest economies took a turn for the worse last week. The Trump administration increased tariffs on $200 billion of Chinese imports to 25%, from 10% previously, and threatened to slap a 25% duty on another nearly $300 billion of Chinese goods. China responded with its own round of retaliatory tariffs.
Bokobza sees a deal arriving in the next few weeks as the most likely path going forward. But Europe is potentially in a lose-lose situation, even if a deal is reached soon. If a prolonged trade conflict ensues, a major economic slowdown in China would hurt demand for European goods and services, reducing output. If a deal is signed soon, then Trump could be emboldened to turn his attention to Europe and Germany and start erecting tariffs there instead.
Bokobza recommends several trades to prepare for either scenario: buy European real estate and utilities sectors, and short autos and metals and mining.
“The two longs are defensive sectors with large domestic exposure, and also benefit from lower bond yields,” Bokobza wrote. “The two shorts are highly cyclical sectors, hit directly by this trade war: Autos has regularly been Trump’s primary target in Europe, and miners are a clear China/global growth proxy.”
Bokobza also noted that technology and industrials companies are the most exposed globally. Both supply chains and customers are concentrated in China for industries including semiconductors and capital goods like heavy machinery. He also recommended buying gold and the Japanese yen as safe-haven assets that can protect against the worst-case scenario of a prolonged trade war.
Write to Nicholas Jasinski at firstname.lastname@example.org