Just as Europe has depended on the US for its defence for many decades, global investors have depended on the performance of US financial assets. The geopolitical awakening provoked by the Trump administration has catalysed long-term public spending as the continent unites around a common goal, which will generate new opportunities in its financial markets. As the new US administration redraws the world order, sidelining Europe, the region, and Germany in particular, have prepared a historic fightback that could have far-reaching consequences.
For European economies, this is akin to an eleventh-hour effort. The current transatlantic rift is generating an answer to the fundamental question of whether Europe can still count on Trump and a Nato under American leadership to ensure its security. It is clear that the US administration and European democracies no longer share the same values. The possibility of the US becoming a rival rather than an economic ally is conceivable.
In European capitals, the motto “America first” is already translating into hard strategic choices and plans to secure greater economic, military and diplomatic autonomy from the US. There is now a real chance that president Trump, as well as president Putin, will trigger an outcome that neither seems to want.
They are uniting the Western world, minus the US, and thereby creating a catalyst for what they seem to be trying to temper: a unified Europe allied with other Western countries such as Canada and Australia. The map of the world is being redrawn.
On trade, the Trump administration is preparing to dismantle the unspoken pact that has been in place for the past few decades: Americans buy European products, in return Europeans buy services and invest in American financial assets (the Trump administration seems to be overlooking the fact that the US has a trade surplus with Europe in services).
Foreign investment thus serves to support the US’s ability to finance its budget and trade deficits while lowering the cost of consumer lending and supporting the strength of the US dollar.
Can Europe maintain its stock market momentum?
In such a context, the recent outperformance of European stock markets and the acceleration of capital flows from the US to Europe, after three years of capital outflows and underperformance globally, is remarkable.
At the start of the year, European valuations were at historic discounts to US and global equity markets. As US tariffs have been slower to materialise than expected, European commercial banks continue to perform well. Europe's new fiscal measures are improving its growth prospects, and we expect the European Central Bank to make fewer key rate cuts, taking the benchmark rate to 1.75% by the end of the year.
Can Europe continue to outperform? In the short term, much of this performance already seems to be priced in, and the market continues to face strong headwinds from potential US tariffs. The impact of fiscal stimulus will be a key variable.
Over an investment horizon of three to six months, we favour cyclical sectors such as luxury cars, consumer discretionary or semiconductors over defensive sectors in global equity portfolios. Investors should ensure that their portfolios are well diversified and take advantage of the opportunities offered by the defence, infrastructure and renewable energy sectors.
In the longer term, Europe’s coordinated efforts to invest in infrastructure, defence and technology could widen the choice available to global investors. Finally, as we have just seen, we should not underestimate Europe’s ability to act under pressure.
Despite the scale of the challenges, there are solutions, and the US policy reversal provides the motivation to consider real change. Moreover, Europe has the means to raise capital and implement strategic initiatives, as it demonstrated during the pandemic.
Europe is at a tipping point and, although daunting, the challenges it faces offer an opportunity to assert its strategic autonomy and secure its future. Its investments, coupled with more politically stable governments in key countries, are helping to open up a more attractive prospect for international investors.
Deterrence is cheaper than war, and as Europe recognises, perhaps belatedly, investing is a prerequisite for its long-term economic resilience and autonomy.
Michael Strobaek is global chief investment officer at Banque Lombard Odier.
This article was originally published in .