UBS Strategists Outlook on European Equities

UBS strategists foresee limited upside for European equities amidst a Trump presidency due to various concerns:

• Potential trade tariffs
• Increased US bond yields
• Possible rollback of green energy policies

These factors could negatively impact equity valuations in Europe.

Impact of Trade Tariffs

While about a quarter of European profits come from the US, UBS highlights that most US goods are made locally, which may soften some impacts. Nonetheless, the threat of broader tariffs and higher duties on imports from China poses risks to global trade. Historical data indicates that European equities fell an average of 7% during previous US-China trade escalations (2018-2019), with sectors exposed to China declining over 10% on average.

Green Energy Policy Risks

UBS also warns that potential rollbacks of incentives from the Inflation Reduction Act (IRA) could jeopardize some European green technology sectors. The impact could be particularly pronounced for utilities, industrials, and electric vehicle manufacturers.

European Defense Spending

The prospect of a Trump presidency may compel European nations to accelerate their defense spending due to uncertainties around US support—this could benefit Europe's defense firms, which previously gained from Trump's election.

Moreover, UBS posits that a Trump administration might help resolve the Russia-Ukraine conflict, stabilizing energy prices which would support Europe’s manufacturing sectors while creating risks for utilities that profit from high prices driven by geopolitical instability.

Sector Positioning

UBS maintains a favorable outlook on consumer staples, IT, and utilities, despite acknowledging forthcoming challenges. These sectors have already accounted for some risks, with fundamental drivers remaining supportive. Recent results indicate a rebound in consumer staples volume, while IT and utilities are seen as attractively valued with solid growth prospects.