- Universal 10% tariff on US imports could hit European exports by 1/3, currently not reflected in estimates
- Potential further deflationary risks from China dumping exports on the EU, as a reaction to US tariffs
- Siemens stock at 4% discount to its ATH and at a 12% premium to its medium-term average rating. Risks attractive to the downside
The recent rise in betting odds in favour of a Trump win has sparked fresh discussions regarding the potential effect of a universal 10% tariff on all US imports. Although for the US the negative effects from an aggressive tariff policy are likely to be offset by sizeable domestic fiscal stimulus, hardly any benefits can be seen for European markets as a whole. The US is the largest export market for the EU totaling an annual EUR500bn in trade goods, growing from a 22% share of European trade exports in 2014 to 29% in 2023 (Figures 2&3), despite the Biden administration keeping in place most of the Trump administration tariffs. However, analysts estimate that a blanket 10% tariff would decrease EU exports to the US by almost a third, with more than a c.1.5pp hit to GDP growth and with several second-order detrimental effects to consumer confidence and employment levels.
As per Eurostat, machinery & vehicles and other manufacturing products account for more than 60% of the EU bloc’s exports to the US (Figure 4). Within Europe, the largest industrial manufacturer is Germany, which is already in a deep economic downturn, this being its second consecutive year of decline. Although recent hopes of a Chinese fiscal stimulus have pushed the DAX back to all-time highs, direct negative effects from tariffs would offset any indirect benefits from a reboot of the Chinese economy. In addition, Europe also faces the risk of China dumping what it cannot export to the US on Europe, exacerbating the current deflationary pressures.
Looking at a single stock name, Siemens, the largest European manufacturer, comes to mind, as it derives 26% of its revenues from the US, one of the highest US exposures within major European industrials, where its global order book, revenues from the US and group profit margins have been increasing (Figures 5&6) in line with the European bloc’s exports to the US since the onset of the Biden presidency. With the stock trading at just a 4% discount to its all-time high and a minimal dollar risk premium over and above the interest rate differential, we believe the market is pricing out a full-blown trade war that could be a direct hit to the company’s revenues, exacerbated by adverse currency effects as the EUR/USD moves close to parity.
As the stock is currently trading at a 12% premium to its medium-term average rating and at a premium to the sector (SXNP), albeit small, we look to play the downside for the name on a potential re pricing of tariff risks from a Trump win and propose Dec24 160 Puts costing 0.9% of spot (Spot ref 179.6, Fut. ref 180.6). Should the spot price drop by 10%, the strategy would return c.4.2x return on the premium employed all else remaining equal.