With European stocks having dropped again in today’s trading with market volatility from potential tariffs, with today’s focus being consumer and banking stocks, Morningstar analysts have provided the following insight:
Jelena Sokolova, senior equity analyst and luxury goods expert, Morningstar said:
“Luxury stocks are seeing significant declines following tariff news, as they are mostly European exporters. Major players like Kering and Hermès have shown no intention to shift production in response to potential tariffs, as they’ve historically succeeded in high-import-tax markets like China. Luxury consumers tend to be travel prone, meaning potential U.S. tariffs may simply redirect American buyers to Europe for their purchases. China is one example of high luxury tax regimes and its split between domestic and foreign luxury spend was 40/60 pre-COVID. High tariffs didn’t stop Chinese shoppers becoming major luxury consumers. The real concern for the sector lies not in tariffs, but in weaker markets, slowing economic growth, and diminished wealth creation- factors currently weighing heavily on investor sentiment.”
Johann Scholtz, senior equity analyst and banking expert, Morningstar, commented:
“The looming threat of tariffs casts a long shadow over European exporters, with potential repercussions for the financial health of the continent’s banks. Should European firms face difficulties due to these tariffs, the ripple effect could lead to higher loan impairments for banks, particularly in countries with significant export exposure to the US.Belgium, Germany, and the Netherlands stand out in this regard. Their exports to the US, as a percentage of GDP, exceed the EU average. Consequently, banks in these nations could be more vulnerable to the fallout compared to their counterparts in jurisdictions less reliant on US-bound exports.In essence, the financial stability of European banks is intricately linked to the fortunes of their exporting firms. As the tariff threat looms, the resilience of these banks will be tested, with those in Belgium, Germany, and the Netherlands potentially facing the hardest hit.”
Also, Kai Wang, Asia equity strategist at Morningstar, provided the following insight on China retaliating to tariffs, with a focus on food:
“We can’t speak on all of China’s retaliatory tariffs, but based on the key soft commodities, we think the impact to our coverage is limited. There is the risk of some inflation to food costs in China but impact to most of the food and restaurant companies we cover may be less evident. So while not immaterial, we think China should be able to manage the risks.
Overall, we think that fundamental earnings impact from China’s retaliatory tariffs on China companies we cover will be contained. For example, US soybeans make up 20% of China’s soybean imports, and 70% from Brazil. There’s been a record soybean crop production in Brazil so supply appears to be available. Hence, feedstock costs may not rise much. Also, pork prices are still at relatively low levels so the impact should be manageable to consumers. China’s imports of pork are minimal, it is around 99% self-sufficient. Instant noodle company Tinyi sources their wheat needs locally. They could see some indirect impact if wheat prices rise in China but as wheat imports is just 10% of needs, it should be contained. Yum China sources 90% of its chickens locally. Also, we view the upcoming fiscal policy details from the NPC meeting this week to have greater importance. Should the fiscal boost come through, market and consumer confidence should find support. While we can’t predict when and what kind of response U.S. policymakers will adopt, the adversarial nature of the ongoing trade war between the U.S. and China is likely to result in a sharp rebuttal from the Trump administration. How far the U.S. will go is up to anyone’s guess, but it will remain dynamic and fluid just like how we’ve seen the markets go up and down since the start of the trade conflict.”
