US President Donald Trump signs a memorandum on intellectual property tariffs on high-tech goods from China, at the White House on March 22. (Reuters Photo/Jonathan Ernst)

Investors Scope Out Potential European Wins From US-China Frictions


APRIL 06, 2018

London. Nobody wins a trade war, International Monetary Fund chief Christine Lagarde said in March. But for some European companies, a bit of friction couldn't hurt.

European producers of aircraft, telecoms equipment and whisky could stand to benefit if US-China trade tensions allow them to chip away at their American rivals' share of the massive Chinese market.

Traders and investors have begun looking at which European stocks could reap rewards if the two countries impose tariffs on a long list of each other's goods.

"A trade war is a battle that could create opportunities," said Hans Ulrich Jost, European value equities portfolio manager at GAM.

China's tariff list targets US aircraft imports, hurting Boeing and potentially opening the way for European arch-rival Airbus to fill the gap.

Boeing is the main proxy in any trade war plays, according to a trader at Northern Trust Capital Markets, who said he had seen some investors short the stock in the past weeks.

China accounts for 10 percent of all US aircraft exports and all US auto exports, according to UBS.

Boeing's shares were punished on Wednesday (04/04) but recovered at the close, while Airbus was among the best performers.

UBS analysts said in a note "the impact should be marginal for Boeing, with limited upside for Airbus." Several traders who spoke to Reuters were pushing the "Buy Airbus vs Boeing" play.

Sportswear and Whisky

The consumer sector could also see some rotation of Chinese demand away from big US names and into European brands. German sportswear brand Adidas, for example, could make inroads to the detriment of US rival Nike.

Investors emphasized that Nike, which makes most of its products in China, would likely see little price change from the tariffs, however. Any impact would likely come from Chinese consumers actively turning away from US brands.

One portfolio manager said he was short Nike shares as he expected Chinese consumers to shun the brand in favor of European names.

US companies producing to export to China, like the maker of Jack Daniels whisky in Kentucky, could be more directly impacted.

European drinks makers' shares rose on Wednesday on speculation Chinese demand may switch to European equivalents such as Martell cognac and Chivas Regal whisky, produced by Pernod Ricard, or Remy Martin cognac.

Nokia was singled out by traders and analysts as a likely beneficiary of tariffs drawing more Chinese demand to European mobile equipment makers. Its shares were steady during Wednesday's sell-off and were up 1.9 percent on Thursday.

Europe's biggest export to China is telecommunications equipment, according European statistics office Eurostat.

Big exporters of industrial machinery, such as ABB and Siemens, could also be relatively favored by higher US-China trade costs because they compete directly with US firms such as Honeywell, said Roland Kaloyan, European equity strategist at Societe Generale.

ABB and Siemens enjoyed strong price gains on Thursday.

Investors also pointed to European chipmakers such as ASML and Infineon as likely to benefit from China switching away from US semiconductor suppliers.

Semiconductor stocks, which have led the rally in tech over the past year, are highly liquid and therefore easy for investors to short as a proxy to the trade war theme, the Northern Trust trader said.

'A Tax on Southern German Auto'

The complicated nature of global supply chains means tariffs on US imports could also negatively impact European companies.

Chinese tariffs on auto imports from the United States, for example, could disproportionately hurt European carmakers which export their products to China from US plants.

"If China passes an incremental 25 percent tax on US-specific auto exports into China [on top of the existing 25 percent tariff for all global auto imports into China], then this is essentially a tax on southern German auto," Evercore analysts led by Arndt Ellinghorst said, pointing specifically to BMW and Mercedes SUVs built in America and exported to China.

Asked about the Chinese tariffs, Daimler said it would not speculate about ongoing negotiations.

Companies with manufacturing sites in China could also get hurt.

Goldman Sachs analysts pointed to the healthcare sector, where medical technology companies GN Store, Sonova and Philips have big Chinese manufacturing facilities.

They mainly sell their products domestically, elsewhere in Asia and in Europe, however, so the impact would likely be limited, they said in a note.