European funds review – what do trade tensions mean for European stock markets?

When we last reviewed the European sector three months ago, markets had been relatively stable – but things can change quickly.

Since then, the biggest development has been the introduction of US trade tariffs, which have had ripple effects across global markets and European economies.

Here’s what’s been announced, how Europe is responding, and what it all means for investors.

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice. All investments fall as well as rise in value, so you could get back less than you invest.

US tariff tensions – the impact on Europe

On 2 April – referred to as ‘Liberation Day’ – US President Donald Trump announced tariffs of 50% on a range of EU imports.

This move wasn’t unique to Europe, it was part of a strategy to recalibrate US trade relations globally, but the EU was among the primary targets.

The announcement created tensions across the globe.

European stock markets, including those in France and Germany, fell sharply.

Like many regions, the EU condemned the tariffs and threatened counter measures.

Trump later delayed the 50% tariffs until 9 July to allow further time for negotiations between the US and EU. European markets responded positively and have since recouped the losses seen in early April.

Trump has since imposed so-called ‘reciprocal’ tariffs of 10% on almost all EU goods. This affects around 70% of EU exports, valued at €380bn.

Despite a recent a US court ruling that declared the 10% tariffs illegal, the EU recognises talks still need to take place and concessions might have to be made.

The final outcome will be crucial in determining future trade relations between the two regions.

At the time of writing, tariffs of 25% also still apply on EU imports of automobiles, steel and aluminium. And Trump has threatened the same for semiconductors, medicines and some other products.

If things don’t turn out the way Europe hopes, exporters’ earnings could come under pressure.

Where does this leave Europe?

With news coming from the US changing on an almost daily basis, it’s hard to draw any firm conclusions about the impact on Europe.

However, despite the external pressures facing Europe, there are signs this is leading to greater unity and policy coordination.

Developments include Germany lifting its fiscal debt brake, which has historically constrained borrowing and spending. This reform could lead to greater public investment, particularly in defence and infrastructure. It’s a sign of Germany’s commitment to addressing longer-term challenges and could help stimulate economic growth.

We could also see progress towards greater European integration.

With tensions continuing to rise between the US and China, Europe has the potential to strengthen its own place in the world economy. That said, the EU is a collection of different states, so speaking with one voice is still an obstacle to overcome.

How have European stock markets performed?

While there have been difficult periods for most major stock markets over the past year, the broader European stock market, as measured by the MSCI Europe ex UK index, grew a reasonable 7.14%*.

This is almost in line with the broader global market, the MSCI AC World index, which grew 7.78% over the same time.

The US makes up a large portion of the global market and has performed strongly in recent years. Recent tariff policy has seen sentiment towards the US turn though, while it’s improved towards Europe.

As a result, European markets have done much better than the US so far this year, though this is over a short time.

Looking at countries individually, the top two European markets over one year were the Spanish and German markets, up 30.61% and 27.91%, respectively.

Spain’s banking sector, which makes up around one third of its stock market, has performed well and benefited from higher interest rates that have led to higher profits. Spain is also going through a period of economic expansion, benefiting from higher public spending and a booming post-pandemic tourism industry.

In Germany, the potential for more investment in areas like defence, following Trump’s calls for greater spending in this sector, and infrastructure has been viewed positively. Companies like software company SAP have also done well due to the potential for increased demand for AI-driven software.

On the other hand, the Danish stock market has been through a tough time, falling 16.21% over the past year.

This was partly due to Novo Nordisk’s share price falling. Markets reacted negatively to disappointing data from the pharmaceutical company’s late-stage obesity trial for its experimental drug CagriSema.

Novo Nordisk makes up just over 50% of Denmark’s stock market, which means it has a significant influence over how the broader market performs.

European smaller companies didn’t perform as well as larger companies over the year, but weren’t far behind and the MSCI Europe ex UK Small Cap Index grew 6.39%.

When investor sentiment improves it can benefit higher-risk smaller companies that rely more on the strength of their domestic economies for success. This has meant they’ve performed better in recent months.

If sentiment towards this area of the market stays high, performance could improve further, though as always there are no guarantees.

How have European Wealth Shortlist funds performed?

All European Wealth Shortlist funds have delivered a positive return over the past year, though the level of performance is mixed.

We expect this – a range of managers with different strengths, styles and areas of focus will perform differently in different economic conditions.

Remember, past performance isn’t a guide to the future, and performance here is over a short time. All investments fall as well as rise in value, so you could get back less than you invest.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

Polar Capital European ex UK Income

CT European Select