Capital Shifts Across the Atlantic: Navigating Trade Talks and Europe's Emerging Opportunities

The resolution of the U.S.-Canada tax dispute and the structural reallocation of global capital toward Europe's resilient sectors are reshaping investment landscapes in 2025. As trade tensions between the U.S. and its northern neighbor ease, a simultaneous surge in European equity fund inflows and foreign direct investment (FDI) is creating a compelling case for investors to pivot toward Europe's stable, policy-backed industries. Here's how the pieces fit together—and where to allocate capital next.

The U.S.-Canada Trade Breakthrough: Near-Term Plays in Steel and Autos

The U.S. and Canada's resolution of their Digital Services Tax (DST) dispute marks a turning point. Canada's abandonment of the DST—set to collect its first $4.2 billion from U.S. tech giants—has defused a tariff war that threatened to escalate to 50% levies on bilateral trade. The revived negotiations, targeting a July 21 deadline, focus on harmonizing tariffs on steel, aluminum, and automobiles.

Investment Implications:
- Steel and Auto Parts: Companies like United States Steel (X) and Canadian National Railway (CNI) could benefit from reduced tariff uncertainty.
- Tech Giants: Alphabet (GOOGL) and Amazon (AMZN) avoid a DST liability that would have pressured margins, but their exposure to broader U.S. trade volatility remains a risk.

However, the U.S. market's reliance on aggressive trade policies—and the resulting uncertainty—has driven capital toward Europe, where structural reforms and green investments promise steadier returns.

Europe's Investment Surge: Where Capital Is Flowing

While U.S. equity fund inflows cratered in February 2025 (-€1.44 billion for U.S. ETFs), European equity allocations surged. The EU's Clean Industrial Deal (CID) and Hydrogen Bank are the linchpins of this shift:

1. Hydrogen: The EU's Green Industrial Play

The EU's Hydrogen Bank awarded €992 million to 15 projects in May 2025, targeting 2.2 million tonnes of renewable hydrogen by 2030. Maritime bunkering projects in Norway, with subsidies up to €1.88/kg, are pioneers.

• Key Opportunity: HyCC's H2Next (25,000-tonne renewable hydrogen plant in the Netherlands) is a flagship project with strong government backing.
• Risks: High costs and delayed policy implementation—Statkraft canceled its NOK 120 million Norway project due to unviable economics.

2. Defense: A Geopolitical Hedge

The EU's Critical Raw Materials Act and defense spending reforms are shielding industries from global shocks. Germany's post-election fiscal plans and the Industrial Decarbonisation Accelerator Act (Q4 2025) aim to fast-track permits for defense-linked infrastructure.

• Investment Grade: Micro Systemation (MSAB.B), provider of ERP systems for Industry 4.0, aligns with EU defense tech needs.

3. Tech & Infrastructure: The AI-Driven Pivot

• ATON Green Storage (ATON.ST): Its vanadium flow batteries for grid stability trade at a 49% discount to fair value, benefiting from EU subsidies.
• Expert.ai (EXAI.MI): Its enterprise AI tools are critical for the EU's Digital Compass Strategy (80% SME AI adoption by 2030).

Why Europe, Why Now?

1. Policy Tailwinds: The EU's Competitiveness Compass and Action Plan for Affordable Energy ensure long-term support for clean industries.
2. FDI Resilience: While global FDI fell 5% in 2024, Europe's Central/Southern hubs (Spain, Poland) outperformed core economies with cost advantages and tech infrastructure.
3. Equity Fund Momentum: February 2025 saw €23.07 billion in European equity inflows, with ETFs dominating allocations to global equities—a sign of risk-averse, diversified growth.

Investment Strategy: Pivot to Stability

Overweight:
- Hydrogen Plays: Back projects with EU subsidies (e.g., HyCC's H2Next).
- Tech Infrastructure: Buy ATON Green Storage (grid storage) and Micro Systemation (ERP systems).
- ETFs: Consider Vanguard FTSE Europe ETF (VEUR) for broad exposure.

Underweight:
- U.S. sectors exposed to trade volatility (steel, autos).
- Commodities like iron ore (Vale) tied to geopolitical risks.

Hedging:
- Pair exposures with inflation-linked bonds and gold ETFs (GLD) to mitigate U.S. fiscal and geopolitical risks.

Risks and Reality Checks

• Policy Delays: The EU's Renewable Energy Directive III and AI Act must be implemented swiftly to sustain momentum.
• Geopolitical Volatility: Middle East conflicts and U.S.-China trade spats could disrupt energy prices.

Conclusion

The U.S.-Canada trade resolution is a near-term relief, but the broader narrative favors Europe's structural advantages. With capital fleeing U.S. market instability and flooding into Europe's hydrogen, defense, and tech sectors, now is the time to allocate to policy-backed, resilient industries. The transatlantic shift isn't just a trade story—it's a decade-long reallocation of capital toward the green and tech-driven economies of tomorrow.