Could Trump's oil policy set in motion a re-rating of European equities? - Bruno Lamoral

The final quarter of last year once again demonstrated the immense impact of US politics on global financial markets. In just three months, European equity investors could have achieved an additional return of almost 15% by investing across the Atlantic, with half of the difference stemming from the appreciation of the greenback against the euro.

Global review

It is fair to say that markets quickly reached a consensus on what Donald Trump's second term means for the global economy. Equity investors are topping up their drinks as the promised tax cuts and deregulation policies are expected to boost corporate earnings. Meanwhile, bond investors are worrying about the inflation hangover that could result from higher trade barriers and tighter labour markets.

Those who have read the book ‘Thinking Fast and Slow’ by Daniel Kahneman will understand that short-term market reactions are often the result of first-level thinking. Humans are predisposed to seek quick answers, leading to spontaneous reactions. Although it is true that the risk to inflation seems to be skewed upwards, the outcome will ultimately depend on what the new government implements, how other countries respond and, perhaps most importantly, the prevailing economic and geopolitical conditions. Therefore, those who keep an open mind and do their research properly will find investment opportunities along the way.

Clearly, Trump isn’t wasting any time. In the month following the election, he already announced over 100 appointments—more than double the pace set by previous transitions. And with the Republicans holding a majority in both houses of Congress during his first two years, we expect significant changes early in his term. This stands in stark contrast to the less decisive leadership currently seen in Europe. Both Olaf Scholz and Michel Barnier lost votes of confidence in December, leaving the EU’s two largest economies in a precarious position while the European industry is facing a recession. Meanwhile, the European Commission continues to prioritise regulation over innovation, hindering the productivity gains that are needed to offset the challenging demographics. Reducing bureaucracy should therefore be a top priority for the new European Commission in 2025.

Outlook

Sentiment amongst investors is strongly bullish, with equity markets appearing crowded. This is typically the moment where caution is warranted. Financial markets need an additional injection of liquidity - primarily dollar liquidity - to sustain the current positive sentiment. However, the Federal Reserve faces the challenge of balancing risks of rising inflation against risks of increasing unemployment. Over the past year, lay-offs in interest-rate sensitive sectors have been partially offset by jobs added elsewhere - of which a large part within the government. But efforts from billionaires Elon Musk and Vivek Ramaswamy to improve governmental efficiency might turn this around. While this might seem marginal, it could move the needle if this comes on top of efforts from the corporate sector to protect its margins.

Something that could prevent this from happening is a decline in energy prices. OPEC countries still have significant spare production capacity, and if Trump follows through on his "Drill, baby, drill" strategy while also forcing a truce in the East, oil prices are likely to fall. This could provide much-needed relief for European companies. If paired with the ECB maintaining its pace of rate cuts, it could pave the way for a re-rating of European equities.