Navigating German Equities: Balancing Tariff Threats and Fiscal Fuel

The German economy, long the engine of European growth, now faces a precarious balancing act: navigating geopolitical tariff threats while capitalizing on a historic fiscal stimulus. With U.S. tariffs looming and a €500 billion infrastructure fund set to reshape industries, investors must parse the net impact on corporate earnings and equity valuations. Here's how to position portfolios for this high-stakes environment.

The Tariff Threat: Impact on Key Sectors

The U.S. has levied a 25% tariff on German automobiles and parts, with potential hikes to 50%, while maintaining a 25% duty on steel and aluminum. These measures have already taken a toll:

• Automotive Sector: Exports to the U.S. dropped 25% year-on-year in May 2025. Major players like BMW (BMW.DE) and Daimler (DAI.DE) face margin compression, as tariffs add up to €6,400 per vehicle.
• Energy-Intensive Industries: Steel producers like ThyssenKrupp (TKA.F) face reduced competitiveness due to input cost spikes.

The automotive sector, representing 6% of Germany's GDP, is particularly vulnerable. Analysts warn that without a tariff resolution by the August 1 deadline, further declines in exports could push the economy into contraction.

Fiscal Stimulus: The €500 Billion Boost

Germany's new government has allocated €500 billion over 10 years to infrastructure, green tech, and defense—a lifeline for sectors not exposed to tariffs. Key allocations:

1. Green Transition: €100 billion for renewables (wind/solar), grid modernization, and hydrogen networks.
2. Beneficiaries: RWE (RWE.DE), Siemens Energy (SEN.N), and startups like Northvolt (not yet public).
3. Infrastructure & Construction: €400 billion for transport, housing, and digital projects.
4. Beneficiaries: Heidelberg Materials (HEIG.GR), Hochtief (CBO2.F), and Bilfinger (BFG.F).
5. Defense: Spending above 1% of GDP exempt from debt rules, favoring companies like Rheinmetall (RHMS.F) and Diehl Defence (DIEG.F).

The stimulus targets long-term growth, with GDP projected to rise 2.5% by 2035. However, short-term growth hinges on execution: labor shortages and permitting delays could slow progress.

Net Impact Analysis: Winners and Losers

The interplay between tariffs and fiscal spending creates clear investment divides:

Sector	Tariff Exposure	Fiscal Support	Net Outlook
Automotive	High	Limited	Defensive stance until August 1
Renewable Energy	Low	High	Strong upside
Infrastructure	Low	High	Stable growth
Defense	Minimal	High	Strategic buy

Investment Implications

Avoid Auto Stocks Until August 1:
- Tariff uncertainty and margin pressures make BMW and Daimler risky bets. Wait for clarity post-August 1.

Embrace Green Tech and Infrastructure:
- Green Energy ETFs: Consider the iShares Global Clean Energy ETF (ICLN) for exposure to German firms like RWE.
- Infrastructure Plays: Bilfinger and Hochtief are well-positioned for rail and housing projects.

Defend with Defense:
- Companies like Rheinmetall (RHMS.F) benefit from rising defense budgets.

Monitor the Euro and ECB Policy:
- A strong euro exacerbates export challenges. ECB rate cuts could ease pressure, but timing is uncertain.

Conclusion: Timing is Everything

German equities are caught between a tariff storm and a fiscal tailwind. Investors should focus on stimulus beneficiaries (renewables, infrastructure) while hedging against automotive risks until the tariff deadline. The August 1 outcome will be pivotal: a resolution could unlock upside, while delays may force a rotation into safer sectors. Stay nimble—this is a market where patience and sector specificity will define returns.

In short, Germany's equity landscape is a chessboard of risk and opportunity. The players? Fiscal fuel and geopolitical friction. The next move? All eyes on August.