Beaten-Down European Stocks Lure Investors Back as Trump Trades Wobble

As the US presidential election draws near, investors are keeping a close eye on the potential impact of Donald Trump's trade policies on European stocks. With Trump's odds of winning the presidency seemingly improving, European stocks exposed to US tariffs have taken a hit, with a basket of 28 such stocks compiled by Barclays tumbling 7% since late September. However, this decline may present an opportunity for investors looking to capitalize on the potential recovery of beaten-down European stocks as Trump's trade policies wobble.

One sector that has shown significant potential for recovery is telecoms. The European Central Bank (ECB) is expected to bring interest rates down to 1.75% by the middle of next year, which should create opportunities in more indebted sectors like telecoms. Lower interest rates make it easier for these companies to service their debt and improve their financial health, potentially leading to increased stock prices.

Real estate companies are also expected to benefit from lower interest rates, as they typically have floating debt. This makes their borrowing costs more manageable, allowing them to invest more in their core business and potentially drive growth. Additionally, consumer-facing areas like retailers and travel companies are expected to be more robust due to the combination of lower interest rates and the fact that they cater to a more domestic consumer in Europe. This means they are less exposed to trade concerns and tariffs, which have been a significant headwind for many European companies.

Small- and mid-sized companies (SMEs) are also expected to perform well due to the combination of lower interest rates and potential M&A activity. These companies tend to be more indebted and have more floating debt, so they benefit from lower interest rates. Additionally, M&A activity is expected to pick up, which also tends to help SMEs as they are more likely targets of acquisitions. However, their cyclical nature means they are still sensitive to economic growth, which remains weak in Europe.

Investors should be cautious, however, as the potential for European retaliation in response to Trump's trade policies could place significant downside risk on US companies with substantial European sales. Many of these companies, which rely heavily on revenue from Europe, are still trading at robust valuations, making them vulnerable to potential profit squeezes from tariffs and changing market dynamics. As such, investors should assess their portfolios for exposure to European markets and consider repositioning holdings in anticipation of potential volatility.

In conclusion, the potential recovery of beaten-down European stocks presents an opportunity for investors looking to capitalize on the wobbling of Trump's trade policies. However, investors should be cautious and consider the potential risks associated with European retaliation and the cyclical nature of certain sectors. By staying informed and maintaining a balanced perspective, investors can make strategic decisions that position them to benefit from the potential recovery of European stocks while mitigating the risks associated with the volatile market landscape.