Are European equities set to fizz?

When I was growing up in Denmark in the 1970s, my friends and I would drink a local cheap imitation Coca-Cola called ‘Jolly Cola’. In the past few weeks, sales of Jolly have exploded like a pop drink after you’ve given it a good shake then passed it to an unassuming friend. Yes, we did that too.

What’s shaken up Jolly Cola? Donald Trump. More specifically, Donald Trump’s threat to take over Greenland. Angry Danes swapping Coca-Cola for Jolly are part of a huge movement in my home country to boycott American goods in favour of local, even if inferior, alternatives.

The Danes are not alone. Canadians are equally furious. It seems they do not want to become America’s 51st state. Drivers upset at America’s treatment of Ukraine may have helped drive sales of Tesla cars down nearly 45% across Europe in January¹, and by 76% in Germany in February².

We have to get this in proportion. There is an irony in the fact that much of the boycott movement is being organised through Facebook – an American company. There are just some American things we can’t live without.

The end of US exceptionalism?

But global investors have to ask whether this is the start of something big. Is this mood change translating to markets? It looks like it is. Tesla shares are down 40% this year³. Though, again, some perspective here is important – they initially soared on the election of Trump. They are simply back to where they were last October. 

There is an irony in the fact that much of the boycott movement is being organised through Facebook – an American company. There are just some American things we can’t live without.

Elsewhere European banks have outperformed their American equivalents by 5% this year⁴, and we’re only 10 weeks in.

While the US cuts public spending through Musk’s bruising DOGE (Department of Government Efficiency) regime, Germany (carrying much lower public debt than most developed countries) is considering fiscal stimulus. Meanwhile Britain – Europe’s second biggest economy by GDP⁵ – is starting to engage more positively with its friends across the English Channel. There is a sense of purpose, collaboration and even optimism here.

Over in the US, where stock markets still look relatively expensive, policy risk has suddenly risen. So has recession risk. Capex spending is drying up. Companies we meet are saying they would love to invest but are on the sidelines now because it is not just the level of tariffs that is adding uncertainty, but how they will be applied. Will it be quotas, too, to stop China dumping cheap goods on the US?

Policy-induced recession is very rare, but not impossible. Global managers who have been underweight European shares for a generation are having to pause for thought as this negativity now threatens to cost them. What matters here is not waves, but tides; not anecdotes but fund flows. It is too early to say if the tide has turned but the signs signal it is possible.

Dollar wobbles

Take the US dollar. This is the global reserve currency. Even with US debt at more than 100% of GDP⁶, America could afford to continue printing dollars to meet demand because global trade centres on the dollar.

But in a world of deglobalisation, maybe that is no longer the case. Buying US Treasuries and Apple shares for dollar exposure is no longer a no-brainer. Do you need a bit of local currency? Some euros, sterling and gold?

In times of uncertainty, the dollar usually strengthens, but this year it has weakened against all other developed market currencies, except Canada’s. The euro was up 5.7% against the dollar between 1 January and 13 March⁷.

Small change in flows could have big impact on performance

It is interesting to look at how the US has come to dominate global markets in the past 15 years. Back then it represented 42% of the MSCI ACWI global index. Today it is 66%. The UK was 8% then; now 3%⁸.

The US equity market is worth $62.2 trillion today – 10 times the size of the pan-European Euronext exchange⁹. The UK LSE-listed equity market is worth $3.2 trillion¹⁰.

It is like comparing a bucket with thimbles. The differential is so great that it would not take a big change in fund flows from the US to Europe to make a significant impact on the latter market’s share prices. And that is especially the case with small and mid caps.

We are not there yet. The headlines suggest the US has gone from a strong economy to one heading into recession and Europe from a no-growth warzone to EU-topia. The reality is more nuanced. 

The headlines suggest the US has gone from a strong economy to one heading into recession and Europe from a no-growth warzone to EU-topia. The reality is more nuanced.

Meanwhile, those campaigning against the US who would dearly like to see the US driven into recession by Trump should be careful what they wish for. If the US sneezes, we will all catch the sniffles.

But those caveats aside, it is not impossible to see a situation where European shares flourish in the year ahead. And where those with a large exposure to the US – especially passive global investors – may suddenly begin to question the wisdom of buying an index so heavily weighted to Trump’s kingdom.

Running an income mandate, I have long had to find alternatives to the Magnificent Seven and other US giants. In recent months that has been hugely rewarding. Now other investors may find themselves facing the same problem.

I have a slightly different challenge. Writing this has made me all nostalgic. I need to find a source of Jolly Cola in the UK!