Will Trump’s tariffs make Europe great again?
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Pushkin. So you know the script, right? This year in markets is all about American exceptionalism and nowhere else gets a look in. So you might be a little surprised to hear that UK stocks have been hitting record highs. Same goes for Germany. In fact, you could argue that in his own little way, Donald Trump is making Europe great again. And

This is all a bit odd, given that Trump could still slap taxes on European exports to the US at any moment. So today on the show, we're asking, what's this all about? Are other markets around the world on the up because of Trump or in spite of him?

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in London. And once again, I'm joined by the New York-based unhedged newsletter scribe, Aidan Reiter, who's here in London with me and where I'm from.

I'm going to call it, Aidan, there is a tiny note of spring in the air. AIDAN MCNULTY: It was beautiful out today. I actually sat outside for lunch without a jacket. MELANIE WARRICK: Everything has got better since you got here. AIDAN MCNULTY: Well, I can't take all the credit. You have to give some of that to Andrew Bailey. MELANIE WARRICK: Governor of the Bank of England. We will come on to that in a minute. So look, over in the States, you talk to lots of investors. Do people even care about Europe at all? Do they bring us up in conversation? AIDAN MCNULTY: I mean, unless we bring it up, it doesn't come up naturally.

if that's fair, right? S&P 500 has been the source of all the growth in the world and all the high valuations for the past couple of years. USA, USA. USA, USA. And so much so that owning other forms of assets, whether they be

You know, foreign equities, foreign fixed incomes, emerging markets just isn't in the vogue anymore. Yeah, yeah. I was talking to a U.S. wealth manager the other day, and he was saying that a lot of his clients now are starting to question, like, why do I need to diversify at all? Why don't I just put everything in the U.S.? That feels a little bit unhealthy. It's called polarizing.

Putting all your eggs in one basket, listeners. But, you know, there's so many notes that we get every day. And while there's been a lot more banks and a lot more asset managers saying, hey, maybe you should diversify. I haven't seen a lot of diversification notes about diversifying out of the US. It's just other asset classes as opposed to just S&P 500. Right, right. That said, I'm sure you are also a regular reader of this. I read the fund manager survey that comes out of Bank of America every month.

And they were saying in the last report, so about a week or so ago, they were saying that there'd been the biggest switch among fund managers out of US and into Europe for 25 years. Like there is money coming into Europe. And the stocks are showing it. Yep. Stocks are showing it. So...

DAX, the German index, that's up over 9% so far this year. Pretty good. It's February. There's something or other. That's not bad. The FTSE 100 is also a record high. It's up about 7%. So the stock 600 index, which is like all across Europe, that's also up about 7%.

Now, the FTSE 250, which is an index of more mid-cap UK stocks, ignore that one. Is it down? It's not down, but it remains the place where fun goes to die. It's up by like about 2%. So that's not doing so well. But it just strikes me as really odd that people are not making a noise about Europe.

Yeah. I mean, again, the story, whether that be the politics story, the geopolitics story, or the market story, has just been Donald Trump and the United States for so long. Yeah. He's cutting taxes. He's very focused on domestic growth. He's cutting regulation. That's all got to be good for the bottom line of US companies. It sounded like you were going to say he's very focused on Mexico, and that's true too, right? He's talking about tariffs on America's neighbors, Canada, Mexico, which has huge implications for the S&P 500. So-

not only does money just overwhelmingly flow to the United States, all of our collective attention does too. Yeah, it's so true. It's so true. Okay, so because you bring up tariffs, let's start with tariffs.

Trump has spoken about wanting to impose tariffs on the EU and on Europe. And look, he might impose trade tariffs on the UK, but we've had the foresight to not really export anything anymore. That was really, really wise of all the industrialists. We saw this coming. So we export much more services to the US and they're much more difficult to put taxes on. So like UK kind

We wouldn't like to see trade tariffs come in, but we should be able to kind of handle it. It would be a bigger issue for the EU. But you look at where Trump has focused his efforts so far this year. There was Colombia, which got tariffs placed on it for about three hours. That came and went. And as we were discussing the other day, there was the threat of tariffs on Canada and Mexico. Before they came in, there was some sort of delay that was agreed on whether these things will actually happen or not. We don't know.

China, there's already tariffs there and he's ratcheted them up and that's a whole other issue. And China retaliated in kind. And China retaliated. They're not taking this lying down. But the point is, there just seems to be quite a lot of doubt in the market that he's going to follow through and actually put these tariffs on the EU. So that does a couple of things. That means that this big, horrible risk to EU exporters just hasn't actually crystallized yet. It hasn't actually happened yet.

And it means, look, if we're going to have this thing where Donald Trump threatens things and then doesn't follow through on them, at a certain point, markets are going to call his bluff. They're kind of already calling his bluff. And that just means that risky assets can either play catch up in the case of Europe because they lagged behind the U.S. last year.

Or you can just take a punt on them as a riskier bet all of their own. Yeah. So in your mind, does the high of the FTSE recently and the high of the DAX and the high of the stocks reflect people not thinking Trump's tariffs will come? To what extent do you think it's playing into fund managers and investors' calculus?

I think it's definitely there. And I think that the fact that the tariffs haven't come yet, despite all of these warnings that came ahead of time, that's supportive to like, you know, what people in markets call risk sentiment, right? It's just sort of, it's helpful to the mood. The other thing is, if you buy into the idea that tariffs on imports into the US are inflationary in the US, and that's one of the big reasons why the dollar has been pushing higher. It's been ripping. It's been ripping. Yeah.

That means you have a weak euro and it means you have weak sterling and it means all the other major currencies around the world have been much weaker. And that's great for exporters across the Eurozone. Yeah. Contrary to what Trump wants. It's actually theoretically helping foreign exports. And also you've got central banks in the Eurozone in the UK cutting rates. Whereas in the U.S.,

The Federal Reserve is slightly painted into a corner here. They can't keep cutting as much as the market previously. And they paused in this most recent meeting. The tone they struck was not necessarily hawkish, but it seems like they are willing to pause and wait and see where inflation goes. Yeah. Which is a very clever way of not weighing in on what they think tariffs will do. Yeah. So to your point, right, part of the...

surge in these other economies might just be down to diverging paths for monetary policy. Yeah. So, for example, just earlier today, we're recording this on... What day is it? It's Thursday. It's so hard to remember what day it is because we get so much news crammed into individual weeks. So, the Bank of England cut interest rates. It cut interest rates by a quarter of a percentage point, which is what the market had been expecting. But...

Two of the nine votes on the Munch Policy Committee were to cut by half a point. And one of those calling for half a point, Catherine Mann, she'd been voting to stay on hold while the rest of the Munch Policy Committee was voting to cut until really quite recently. She's famously very hawkish.

So that's weird, right? Yeah. And it tells you a couple of things. It tells you even if the UK economy is in a spot of bother, which I think is reasonable to say that we are. Yes. I mean, today, the Bank of England downgraded their forecast for UK growth this year, I think by half. So it's interesting that FTSE's

soaring when the economic outlook is so, so bad. It is and it isn't because the weird thing that the UK market does is stocks move in the opposite direction to the currency. Because such a large part of revenues in the FTSE 100 are dollar denominated. Oh, I see. That's why...

You know, stocks often go up in the UK even when the economy is performing badly because sterling is weaker. So it's just another reminder that economic performance and market performance are not necessarily the same thing. So is the reason the FTSE is hitting record highs the one-two punch of a rate cut and worse growth?

In a way, yes. And that is also why you've got this gap between the FTSE 100, which is very international, full of dollar revenues, and the FTSE 250, which is much more domestic, a lot more mid caps and smaller stocks there. That's kind of a better reflection of the UK economy, you might

argue. So that's why you've got the FTSE 100 kind of pulling ahead of the FTSE 250. And I think one of the other reasons why European markets are doing better than I think a lot of people expected is the

So the U.S. market is all about tech, tech, tech. And it turns out that that's not necessarily a good thing. Concentration is not always your friend. Concentration is definitely your friend when it works in your direction. And it has been for quite a while. But as we learned with DeepSeek, there's a lot of risk there. Yeah. So China came out with its own strategy.

decent quality, very cheap AI alternative. We talked about this on the pod a little while ago. You can listen back. So maybe having a stock market that's not so tech heavy is not such a bad thing after all. Yeah, absolutely. That brings us to China, though, which I think is also...

complicated picture in this. To your point on it's good to have a market that's not too tech heavy, Chinese stocks have had an interesting run for the past six months when China did a fiscal stimulus, as we've spoken about on the pod. Sorry, they did a stock stimulus, is more accurate. They really tried to pump up the stock market. It had a huge surge, and it had a huge surge both because of that support, but also because the Chinese government flirted with the idea of doing real fiscal stimulus. That is not

to bear, the fiscal stimulus part. Since that huge jump in October, I believe, they've just been slowly sliding down. They're still higher than they were before that was announced because it seems like the Chinese government will do some form of stimulus. China exceeded most people's growth expectations this year. It hit its 5% target. What's interesting here is Chinese stocks have had a pretty big fall in the beginning of the year. Part of the reason is Tencent, which is a large part of their stock index, the CSI and the HSI,

It fell after the United States government put it on a blacklist. Right. So if you have too much concentration in your stock market around tech, around things that have high exposure to the U.S., that can be tricky for you. So that's probably why so lots of other markets around the world have been having a decent run actually so far this year.

Whereas the CSI 300 in China is down like 2% or something. 2% this year. That's not a disaster. Absolutely. And given the history of Chinese stocks, that's not bad at all. Yeah. What happened over the past two weeks was most Chinese investors and markets were closed because of Chinese New Year. Exactly. So yesterday, or this is Thursday, on Wednesday was the first day they were open after Chinese New Year. And in the time they were closed, you had the announcement of Trump tariffs, of China's retaliation, and you had deep seek. Right. But when it opened...

It was up a little bit on bullish sentiment, and then it just kind of flatline slowed the rest of the day. And I think it's a reflection of a couple things, right? People are not as bullish once they realize that U.S. tariffs on China will have an impact. And also because there hasn't been that much materially changed in the stock market situation, even with DeepSeek, that would change the narrative of Chinese stocks. Right.

What are you picking up in terms of what investors tell you about whether China is investable? You get a lot of back and forth on this. Like for some investors, particularly ones that are quite risk averse, they're just like, I don't get it. I'm out. The regulatory risk is too high. The policy risk is too high. The Trump risk is too high. I just don't see the point of putting money on the line in China. And others are like,

It's one of the biggest economies in the world, guys. Like it's a big part of the emerging markets complex and you've got to have something there. I don't know. What are you picking up? To your point, a lot of investors say we don't want to touch it. There are, however, a lot of China bulls who say, I actually only want exposure to China because I think there's so much upside and their stock market is so undervalued based on what the economy is.

I have spoken with more investors who are more interested in the more complex trades in China as opposed to just going long their index or their stocks using, you know, REM and BPEGs and using FX trading in order to get a profit. That is a much more usable system, more predictable system. What about emerging markets? I mean, emerging markets have had an interesting year. So they have been down since October.

despite, you know, Europe and everybody else ripping. And that's for a couple reasons. Part of it is the outlook for them is not so great under Trump. The strong dollar, not good for the rest of the world generally.

They also have diverging monetary policy from Europe and the UK. A lot of these economies have actually hiked rates, not lowered rates, because inflation's picking up. That tends to be bad for stock markets. But there's also some interesting things happening in these indices over time. Something that we're going to be writing about on Unhedged Newsletter soon is that these indices have also become more concentrated.

So if you look at emerging markets ex-China, that typical index that excludes China, TSMC is now 15% of that. TSMC is Taiwan's semiconductor. And Taiwan's semiconductor relies on a lot of the narratives that are going on in the US. So it's not like it's a good hedge anymore, which is something that was appealing about emerging markets in the past 10 years. They were a big diversifier. Yes. Maybe they're not such a diversifier after all. No, they're getting very tech heavy, especially in semiconductor chips and

apps that are reliant on the same narratives. On top of that, being an emerging markets investor was always hard. You have to deal with a lot of disparate economies and disparate monetary policy pathways. And with that high concentration, it's much harder now to invest in them. There's just so much noise, essentially, across this really large basket, as we've talked about, a basket that probably shouldn't be together. Yeah.

Yeah, emerging market. It's a stupid phrase, but it is what it is. We've just got to live with it. There's no way Korea and Ghana should be in the same basket. No, it's silly. We're using the vocabulary we have. But I guess the moral of the story is there's way too much focus on the U.S. Absolutely. And also...

Is the rest of the world cheap? Like the price to earnings ratios are much, much lower, which means you as an investor are paying out less money for the revenues that the companies bring in. Yes, but you know, you have to also look that the US is a big market and these are some of the world's best companies. When you actually look at these indices and you look at companies that are comparable, whether that be...

Ahold Delhaize, I think I'm saying that right, versus Kroger in the US or BAE in the UK versus Lockheed. When you just go down, there's not that much of a discount. So that's the thing. If you compare it on an index level, S&P 500 price earnings ratios to FTSE 100 price earnings ratios, it looks like the UK is just...

absurdly cheap and you must, must buy it. But again, because there's so much tech concentration in the US, that skews all of these comparisons out of line. Whereas if you compare something that's much more apples to apples, oranges to oranges, so take a construction company against a construction company,

The disparity is actually not that high. No, there's not that many discounts on a one-to-one basis. Same with the index. If you do the price earnings over growth for the indices and you compare them to the U.S., there's not even that much of a discount to begin with. So wouldn't you rather just own the whole U.S. growth story as opposed to a sliver of it? Yeah, yeah, it's reasonable. But...

It does strike me that there's a lot of people out there, whether they are retail investors or wealth management clients, who've really got their blinkers on. They can only see the US. And, you know, the kind of cliche in markets is the closest you're ever going to get to a free lunch is to diversify and spread your bets a bit. So this is just all a bit of a reminder that that does make an awful lot of sense. This is not investment advice, but it does make a lot of sense. We are going to be back in a sec with Longshore.

In the short term, there's going to be a lot of volatility. But in the end, I think what we've seen is that the underlying aspects of productivity may end up being the more profound driver than the fears of government impact from the fiscal or the monetary side for that matter. To learn more about macroeconomic disruption, subscribe to PGM's The Outthinking Investor in your favorite podcast app.

Alrighty, now it's time for Long Short, that part of the show where we go long, a thing we love, or short, a thing we hate. Aidan, what you got? I am short, posthumous publishing.

Okay. I'm not against authors' works being published after their death. I just think there's too many times they do it without the author's express permission. So there's a story in the New York Times yesterday about Joan Didion's notes to her husband being published, and they were not explicitly told to be published. They were just found very organized among her belongings.

I personally believe we should be only publishing when the person has expressly said they want something published. Their publisher or agent surely would have known if they were working on a book.

On the other hand, they are dead. They are dead. But again, got to respect those wishes. As much as I want to read that Joan Didion book, because I really do. Okay. That's an interesting short. I am short. I don't know if you read this piece that we had. It was a big read the other day by our colleague Jennifer Hughes. I'm massively limit short the idea of 24-hour trading. Oh, yeah. This is insane.

a no good, terrible, very bad idea to keep stock markets tradable 24 hours a day, seven or five days a week. I'm rolling my eyes so hard. Weekends and evenings are a really useful firebreak when the brown stuff hits the fan. You do not want these things running 24 hours. I just think

please don't do it, which means it will almost certainly happen. Well, when I speak with crypto bros, they're always like, well, the best benefit of crypto is all the time training. I don't want that. Until you get like margin called on Christmas Day. Yeah, absolutely. It's just not like, I don't think it's a problem that we needed to solve. No, but sometimes crazy things do happen, even if they're very bad ideas. However, listeners, it'd be a very good idea to listen to us again when we are back in your ears on Tuesday. So chat to you then.

Unhedged this week was produced and edited by Jake Hopper. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.