Happy Hour Ends for European Stock Investors Hit by Trade Spat

(Bloomberg) -- Good times never last.

Everything that could go wrong has gone wrong for European stock investors in May. Brexit flare-up? Check. Trade war tension? Check. Lackluster growth? Check. Populist parties back in the spotlight? Check.

Just a month ago, European equities were competing with the U.S. for stellar 2019 returns and Goldman Sachs Group Inc. had raised its target for the region’s stocks citing expectations that China’s stabilizing economy would boost euro-area expansion. Now, they’re heading for their first monthly drop since the December plunge with little optimism on offer for the coming days.

Even before the recent setbacks, European stocks struggled to attract investor appetite, making their start-of-the-year rally a low-participation one. With Theresa May’s premiership hanging by a thread in the U.K., German business confidence at a four-year low, populism on the rise in Italy and the escalating U.S.-China trade spat casting a shadow on the region’s chipmakers and auto companies, traders say it’s even harder to make the case for European equities now.

“With a growth outlook that remains mixed and no near-term prospect of U.S.-China trade detente, there is somewhat less near-term upside in equities,” said Jon Cunliffe, chief investment officer at Charles Stanley & Co. in London, which is underweight European equities.

Automakers and miners are some of the biggest losers in Europe this month, and that’s no surprise as they’re the most sensitive to trade news. Although U.S. President Donald Trump delayed imposing tariffs on imported cars from the European Union by 180 days, this just means that uncertainty has been extended, and German stocks have been particularly hurt.

According to Joh Berenberg Gossler & Co.’s Ulrich Urbahn, prolonged uncertainty surrounding Brexit and trade wars will weigh on European economic data and interest rates will remain low for longer, hitting European banking stocks. The sector is down about 10% this month.

Considering the intensity of the U.S.-China tech conflict, European technology and telecom stocks have fared reasonably well and are down about 4% in May, less than the broader benchmark. Nokia Oyj and Ericsson AB have both surged on the back of reduced competition prospects from Huawei’s ban.

“There may be some winners in Europe such as Ericsson and Nokia which look set to benefit as Huawei is increasingly squeezed out of the telecommunications equipment market in developed markets but on the other hand this is likely to disrupt and increase cost of 5G network roll-outs for European telecoms,” said Chris Hiorns, a fund manager at EdenTree Investment Management, which oversees about $3 billion.

European chipmakers on the other hand have not enjoyed the ride, with ASML Holding NV and STMicroelectronics NV among the biggest decliners on the Stoxx 600.

“The range of possible outcomes of a trade war is very wide,” said Andrew Koch, a fund manager at Legal & General Investment Management in London, adding that a broader trade war between the U.S., Europe and China was possible although as yet unlikely. “This would clearly hurt European economies and companies. It’s not currently a high probability but markets hate uncertainty hence the recent falls in markets.”

To contact the reporters on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net;Justina Lee in London at jlee1489@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Namitha Jagadeesh

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