Donald Trump has been back in the White House for three months but his influence on global markets is already undeniable. Just last week, his ‘Liberation Day’ caused chaos, with stocks dropping around the world.
As Jason Hollands, managing director at BestInvest, said: “Most economists would agree that higher trade barriers will hurt global growth and risk reigniting inflation and therefore see no upside from rising tariffs”.
However, despite Trump’s anti-globalisation policies, some markets have managed to perform well so far in 2025. Most European indexes are up year to date, with the standout being the German DAX, which is up 6.1%.
Performance of European indices YTD
Source: FE Analytics
No one knows whether these tariffs will be rolled back or if countries will fight back with their own retaliatory tariffs. Europe has threatened to do so, as have many other countries hit in last week’s assault.
For Ben Lambert, manager of Ninety One European Equity, “uncertain trade dynamics and tariffs” remain the crucial risk factor to Europe, but not all experts agreed.
Will James, manager of the Guinness European Equity Income fund, said the origins of the recent resurgence are with Trump himself. “Trump has done Europe a favour”, he argued.
James said Europe performs best when it has a “crisis of identity” and when market events force it to become more introspective.
Trump’s more aggressive dealings have taught Europe that it cannot rely on America and that it needs to be able to stand on its own. This has caused Europe to finally deal with issues it had been ignoring since the sovereign debt crisis in 2012, he explained.
He pointed to Germany as the main example of this. He argued the German elections and the possibility of a far-right government were the biggest political risks to Europe this year.
While the new politically central administration does not have an absolute majority, it is considering a “loosening of the fiscal purse strings”, debating measures such as a further £500bn investment in infrastructure and £400bn on defence.
James explained that if the largest European economy begins reinvesting, other European countries are likely to follow suit. As a result, Europe’s strong balance sheets, low fiscal debt and comparatively higher borrowing capacity will become more obvious.
“As Europe sorts out its own issues and things in the region become less bad, they actually get much better, particularly as its US counterpart has recently weakened.”
Additionally, James explained that the negative impact of Trump’s tariffs may have been overemphasised.
He pointed to Mario Draghi’s recent claim that internal trade barriers in the EU are equivalent to 111% tariffs on services and 45% for goods, much higher than the 20% tariff Trump imposed last week. “All you need to get things moving is to address those internal trade barriers”, James said.
Francis Ellison, client portfolio manager at Columbia Threadneedle Investments, agreed that the negative impact of tariffs was overstated.
He explained that tariffs may impact American companies dependent on exports just as much as businesses overseas. European companies that manufacture locally might unexpectedly benefit, especially as competitors in regions such as China face harsher penalties.
James Sym, European specialist at Goodhart Partners, added: “It may seem counterintuitive to put forward that Trump’s second term in office has the potential to be better for Europe, but there is a strong case that it will be.”
Along with tariffs, the withdrawal of US defence from Europe now seems to be a “foregone conclusion”, significantly changing the status quo.
“But here is the rub. It is precisely because of this new world order and Europe’s place in it that its resurgence is happening," he said. Trump’s more volatile approach to foreign policy has forced Europe to do “all the things they should have done over the past 15 years”, Sym argued.
For example, Sym said Draghi’s September 2024 report, The Future of European Competitiveness, has encouraged deregulation and Europe-wide cooperation in telecoms, automotive and defence investment when Europe can no longer rely on US aid.
While companies such as Rheinmetall have surged by 124% this year because of this, increased defence spending will also have knock-on effects on other industrial and consumer businesses, Sym said.
He added that the opportunities are not in "speculative stocks such as oil companies" but in quality businesses with stable fundamentals that have gone under the radar.
For example, he pointed to Italian company Danieli, which creates equipment used in the manufacturing of steel and faces “very little competition in its sector”. While the company has grown modestly over the past decade, its shares are up 27.9% so far this year as demand for steel in defence businesses has risen.
“Combined with the catalyst of president Trump’s apparent determination to upend what had until recently been accepted as global diplomatic and security norms, the case for revisiting European equity allocations could scarcely be stronger.”
“The thought might horrify him, but Donald Trump could well be the US president who makes Europe great again”, Sym concluded.