Tariff war makes European reform even more likely: Trump presidency should be better for Europe than for the US, argues James Sym, Partner and European equities specialist at Goodhart Partners LLP.  

If there was ever any doubt that the world is in a very uncertain place, then the period since Donald Trump’s now-infamous “Liberation Day” announcements will certainly have brought clarity on that point.  

While it is of course the resulting volatility that has dominated the headlines, we believe investors would be well advised to consider carefully the broader picture.  

In a recent paper, we set out in some detail why we believe that Trump is essentially going to force Europe to implement a range of reforms with the potential ultimately to be significantly positive from an economic point of view. We believe that the introduction of new tariffs will only lead to further policy responses in this spirit.  

Europe vs. US valuation anomalies

Furthermore, the reality of the extreme valuation anomalies (and investor positioning) between US large-cap equities and European stocks has now been laid bare, not least given the weakness seen in the former throughout this process. 

In terms of the impact of the announcements on stock prices, many have fallen to levels close to pricing in a recession. That being said, it is important to emphasise that this is not universal; a deep recession would cause significant further downside, and is a downside scenario that remains central to our thoughts on risk management.  

We believe that a notable loser in the present scenario will be the European banking sector, to which we have trimmed exposure in the portfolios we manage, taking us further underweight. We expect tariffs to have a deflationary effect in the rest of the world, putting downward pressure on bond yields, which should in turn be detrimental to banks’ net interest margins, and therefore to their profitability. The risk of a provisioning cycle (meaning that banks are forced to recognise losses on loans even before they materialise) has also increased. 

Industrial strength

We remain more optimistic on the overall picture for European industrial companies, which in the main are flagging very substantial pent-up demand and strong sales pipelines. Despite these encouraging signs, the general level of economic uncertainty – further compounded by the tariff announcements – means that confirmed orders are taking longer to materialise.  

Against this backdrop, we do not anticipate an industrial pick-up for the next couple of quarters, certain exceptions notwithstanding. One example is steel manufacturing equipment maker Danieli, which has seen its order book rise from a long-run average of approximately €2 billion to around €6 billion, with a further €3.5 billion of very late-stage orders that will probably complete by the end of the year.  

The strength in the sales pipe has had the effect of extending Danieli’s order backlog for some of its key products – in a sector characterised by huge barriers to entry – from four years, to five. This should result in something of a virtuous circle for the company, as customer recognition of extending delivery timeframes typically leads to altered behaviour, and the placing of ever-earlier orders. The aviation giant, Airbus, has been another beneficiary of this trend.  

Risks of course remain; a US consumer recession, in particular, could create further challenges for investors. Although equity volatility may be stealing most of the headlines, our discussions with businesses indicate that companies themselves are, by and large, somewhat more sanguine about the outlook for the market.  

Although we currently have a small-cap bias, owing to more attractive long-term valuations within that part of the market, pleasingly, many of our more defensive positions (such as Nestlé and Vonovia) have helped to cushion against recent falls.  

While volatility is of course unnerving, it’s important to remember that for agile, contrarian investors like ourselves, such periods can provide attractive long-term entry points to buy into good – but temporarily out-of-favour – businesses. 

About Goodhart Partners LLP 

Founded in 2009, Goodhart Partners LLP (“Goodhart”) is an independent, London-based global equity investment boutique that offers a range of strongly differentiated investment strategies, concentrated on public markets.  

The firm is focused on developing investment strategies for an economic and market landscape that it believes will bear little, if any, resemblance over the coming decade and beyond to the one that has prevailed over the last 15 years.  

Goodhart holds a minority stake in Asset Value Investors (“AVI”), a UK-based boutique with a distinctive, long-only, value approach focused on good quality, neglected securities trading at a discount to their NAV. AVI manages £1.8bn in AUM as at 31/01/25. 

In 2023, Goodhart announced a strategic relationship with Global Opportunities Trust plc ("GOT"), through which Goodhart provides investment sub-advisory services to assist GOT in managing its global listed equity exposure. 

Goodhart has AUM of £552m as at 31/01/25, and is authorised and regulated by the Financial Conduct Authority.