How to hedge your portfolio against Trump’s tariff threats

While Europe faces the prospect of tariffs on its exports to the United States, TS Lombard has advised investors in the region on how to “hedge” their portfolios against tariff charges. U.S. President Donald Trump warned before his election victory that he would impose a global tariff of up to 20% on all imported goods. This week, he announced that Mexico, Canada, and China would be the first countries “in the crosshairs.” The European Union could be next, given that the bloc has a trade surplus with the U.S. of 158 billion euros ($165.6 billion)—one of the biggest issues for the incoming president.

Trump views tariffs as a way to level what he sees as unfair trade imbalances and to stimulate the U.S. economy and jobs, although critics argue that local consumers will end up paying more for imported goods.

In a report this week, Davide Oniglia, director of European and global macroeconomics at TS Lombard, advised European investors on how to handle “tariff risk” by viewing their exposure “the way Donald Trump does, i.e., in terms of the dollar value of the U.S. trade deficit/surplus by country and sector.”

He suggested three main ways for investors to “hedge” their portfolios against tariffs:

“The periphery” to outperform “the core”

Investors should focus on the southern “periphery” of Spain, Greece, Portugal (and potentially Italy), Oniglia said, as these countries are likely to perform better than the larger “core” economies.

The latter, including Germany and France, as well as Ireland, Austria, Sweden, Denmark, and Finland, have significant trade surpluses with the U.S. They also have key sectors exposed to tariff risks, such as German and Swedish automakers, French luxury goods companies, beverage manufacturers, and aerospace firms like Airbus, as well as Denmark’s pharmaceutical industry.

On the other hand, the peripheral countries have much more balanced trade relations with the U.S. and enjoy other advantages, such as economies that are more service-oriented, higher sensitivity to lower interest rates, and stronger GDP and profit growth, Oniglia added.

Selective approach

Second, the economist noted that while it makes sense in the short term to hold fewer European stocks compared to U.S. stocks, investors seem “too dismissive” of the opportunities in European markets.

“In absolute terms, the current strong negativity toward anything related to Europe may offer good opportunities for the investor who is willing to differentiate by company characteristics, international presence, and business model once it becomes clearer what the tariff charges will be,” he said, urging investors to be selective.

Opportunities in defense sectors

Third, Oniglia from TS Lombard noted that Trump provides a catalyst for increasing defense spending and public investments in the EU and, as a result, advised investors to “hold long positions in defense stocks and keep an open mind for potential positive surprises regarding policy/growth in the EU.”

“EU defense stocks, which have not only significantly outperformed Eurostoxx in the last two years but sometimes also the Nasdaq, are likely to continue to perform well,” he added.

It is also likely that Trump will be open to negotiations with European countries—and potentially with European businesses, TS Lombard said, with the result possibly being selective tariffs depending on his relationships with national leaders.

“We know that for Trump, negotiations often come down to personal relationships with his counterparts, and that friendly political leaders may hope to secure a better deal. This also has important investment implications,” Oniglia concluded.