Tit For Tat

• China is the EU’s second largest trading partner, consuming c.10% of their exports
• This week European distillers’ share prices fell as China announced (up to 39%) brandy tariffs
• Germany accounts for c.50% of the EU’s total exports to China

China has become a major export market for European brands, and their decline in consumer spending in recent years amid the property crisis-led economic slowdown has weighed heavily on European share prices. Most recently, China has retaliated against the EU’s Chinese EV tariff (45%) and announced prohibitive measures on EU brandy imports, sending shares in major cognac producers down this week (Remy Martin -8% and Pernod Ricard -4%). This was targeted at French exports, as the country’s shipments reached $1.7bn last year and accounted for 99% of Chinese imports of the spirit. Given auto exports have hit record highs and make up a meaningful proportion of Chinese output, some could say China is looking to impose tariffs where it hurts. At the least, their retaliation signals a heating up of the trade war, and indeed a U-turn in policy after China denied such a tariff would be imposed only a few months ago. Therefore, it’s prudent to consider what might be next in the pipeline should trade tensions escalate further, especially given the implications for EU profitability, valuations, and employment.

Annual Chinese EV exports

Over 30% of Chinese EV exports were to the EU in each of the last 3 years

Future concerns

Due to the makeup of the European market, two sectors look particularly vulnerable should China proceed with further tariffs: Import duties on large-engine EU vehicles could be reviewed, which would be a particular blow to German car manufacturers who exported $1.2bn of the good last year and continue to struggle with EV competition Luxury retail brands which have become dependent on sales in China and fell up to 7% on Tuesday amongst fears that tariffs will broaden to their sector with c.$12bn exported last year in leather goods, perfume, jewellery and apparel Bowmore portfolios Despite the headwinds that a trade escalation may present, Europe is a well-diversified market and home to a number of internationally important financial, tech and healthcare businesses that can help to provide defensiveness should any one sector be targeted, including the likes of Novo Nordisk, ASML, Deutsche Boerse and Sanofi. We allocate actively to European equities that look to invest in high quality businesses with strong competitive positions, robust financial health, and the potential for sustainable growth and Carmingnac European Leaders, held in our ESG portfolios has returned 10.4% year to date.