By Danilo Masoni and Julien Ponthus
MILAN/LONDON (Reuters) - Euphoric stock markets celebrated the China-U.S. trade truce by marking record highs but European auto shares continue to suffer, reflecting the stress the industry is under and fears U.S. President Donald Trump will target Europe next.
There's no shortage of issues which could trigger a fresh trade row between the continent and the United States, from plans for a tax on big digital companies like Amazon (O:AMZN) and Facebook (O:FB) and subsidies for Airbus (PA:AIR), to the involvement of China's Huawei in building 5G networks and different approaches to tackling Iran's nuclear programme.
Autos look particularly vulnerable, and this week's meeting of world leaders in the Swiss mountain resort of Davos gave Trump his latest stage from which to threaten a 25% tariff on car imports from the European Union, if the bloc doesn't agree to a trade deal.
Tariffs would be an additional blow as carmakers struggle with an auto industry downturn, particularly in key market China, and the need to increase electric vehicle investment as several countries move to eventually ban combustion engines.
On Thursday, auto stocks (SXAP) were among the top fallers in Europe, down 2%, making them the worst sectoral performers so far in 2020.
Last year, they fell 17% while the broader European Stoxx 600 index (STOXX) had its best year in a decade with a 23% rise.
Since late last year, auto shares also have decoupled from Germany's DAX (GDAXI), the export oriented index of Europe's largest economy, plunging to a 10-year low relative to the index.
(GRAPHIC: European autos vs DAX - https://fingfx.thomsonreuters.com/gfx/mkt/13/1474/1449/European%20autos%20chart.png)
"Trump has long been lamenting about the trade imbalance with Europe and this could be another card to play during the presidential election year," said Michele Pedroni, fund manager at Decalia in Geneva.
"(He) has already taken or threatened action, for example in the auto sector, which is among the most sensitive to trade. Not all of his threats were just rhetoric," added Pedroni.
While the signing of a "Phase 1" trade deal between Washington and Beijing has removed some of the uncertainty hanging over markets and dampening global business sentiment, the relief could prove short-lived for Europe if Trump's attention shifts, leaving German luxury cars first in the firing line.
TRADE WAR PRESSURE
Evercore ISI has estimated that VW (DE:VOWG) faces a 2.5 billion euro hit if the U.S. imposes 25% tariffs on EU imports, with Daimler (DE:DAIGn) facing a 2 billion-euro blow and BMW (DE:BMWG) 1.7 billion euros.
"Investors need to be vigilant", said Maximilian Kunkel, Chief Investment Officer Germany at UBS GMW in Frankfurt.
The U.S. is the main export destination for EU-made cars. According to Eurostat, cars from the bloc accounted for 29% of total U.S. auto imports in 2018, well ahead of China's 17%.
"There is indeed trade war pressure on the sector, that’s something we talk about with investors”, said Roland Kaloyan, head of European equity strategy at Societe Generale (PA:SOGN).
However, he added that while European carmakers are commonly used as a proxy for trade tensions with the U.S., the risk that they won't be able to curb emissions in time to abide by new EU rules was also weighing on the sector.
Daimler’s latest profit warning on Wednesday, one in a long line from European auto and auto parts makers, highlighted the stress the sector is under, Kaloyan said, adding that the expected upswing in global auto sales may also disappoint.