Europe joins China on the defensive ahead of G20

Summary

Sliding car stocks and heavy mining shares return the theme that’s orbited European markets all year back into focus as the G20 summit looms large.

European shares in defensive posture

STOXX’s cars and parts sector sell-off has quickened to a 2% fall in the home straight of the week. The steadier 0.7% retreat of metal and mining shares also reveals key defensive positioning ahead of the weekend. Both European industries have huge exposure to China. A news report this week also underlined that the former could still yet be targeted for higher tariffs. The region’s key Auto & Parts gauge is down around 23% this year. That’s around three percentage points better than the most challenged equity group of all, banks.  In effect, the Auto & Parts slump is the discount applied to an informal agreement during the summer between U.S. President Donald Trump and the European Commission President Jean-Claude Juncker for a pause in tariffs. The implication is that the sector could fall further in the coming months.

Autos de-rated

Supply chain anxiety is embedded in the car industry’s rating too. A ratio of European car and parts makers’ shares against earnings forecast in the next 12 months is down 8% since 2017 to a sluggish 6.6. The concentration of such shares in Germany’s DAX helps explain why that market is even narrowly underperforming Italy’s FTSE MIB this year. They are the weakest large continental indices, down 13% and 12% respectively. Europe’s aggregate gauge, STOXX is down 8.5%. It too could head lower into the year end.

‘Ceasefire’ may help just a bit

Arrangements for the most crucial G20 discussions point to low expectations, so the best possible outcome is that the U.S. and China can agree a ‘ceasefire’ and arrange more talks before Washington goes ahead with another set of tariffs pencilled in for January. As such, uncertainty will remain on Monday, regardless of what happens over the weekend. Relief for tariff-sensitive shares and consequently across European stock markets as a whole is therefore likely to be fleeting.

Asian markets most optimistic

No global market will be spared a revival of volatility if G20 talks prove hollow, but we continue to expect regions with most at stake to be hit harder. With the Asia-Pacific region outperforming since markets generally bottomed on 29th October, it looks like G20 disappointment could be most magnified there. China’s key CSI300 has managed to keep hold of a solid 3% return despite marked volatility. A rise or fall of at least 4% in reaction to G20 events is likely, looking at CSI300’s performance in volatile sessions since the end of October. In contrast to Asia Pacific markets, we perceive European indices to have maintained a clear discount in anticipation of a negative outcome. If, at worst, presidents Trump and Xi have an acrimonious and unproductive meeting, little would have changed in the outlook for trade. We’d therefore expect European shares to stabilise more quickly. Volatility spikes in U.S. stock markets would also likely be short-lived. Wall Street’s  catch-down with regions elsewhere would then continue into year end.