What does a materially lower USD mean for Europe?

Jefferies analysts anticipate a weakening U.S. dollar, potentially reshaping European investment strategies with a focus on sectors like Airlines, Banks, Consumer, Mining, and Infrastructure. The firm outlines scenarios ranging from a controlled dollar decline to a disorderly devaluation, noting the Trump administration's focus on narrowing the U.S. trade deficit and a possible shift in the dollar's role as a global reserve currency. Jefferies sees Europe's relative growth outlook improving and adjusted its Franchise Picks, adding AB InBev while removing ASM International, citing EM tailwinds and cycle weakness respectively.

Analysis

Jefferies analysts project a significant reshaping of the European investment landscape driven by an anticipated weakening of the U.S. dollar, which has already declined 8% since January. Investor conversations, according to Jefferies, have shifted from questioning if dollar weakness will continue to when it will. The firm outlines two potential scenarios: a controlled dollar decline, beneficial for sectors like food, retail, and steel if trade deals are managed and central banks provide stability, or a more disruptive disorderly devaluation, which could harm global growth. Regardless, European equities are seen as significantly impacted, with Airlines, Banks, Consumer, Mining, and Infrastructure identified as best positioned. Structural drivers underpinning this outlook include the Trump administration's agenda to narrow the U.S. trade deficit and a potential structural change in the dollar's role as the global reserve currency. Jefferies highlights an improving relative growth outlook for Europe, supported by fiscal expansion, capital markets union, and rising competitiveness, suggesting the U.S. has peaked as a share of MSCI World market capitalization and that the case for large-cap, liquid European stocks may be stronger than ever. In response, Jefferies adjusted its Franchise Picks, adding AB InBev (BUD) due to emerging market tailwinds and its U.S. dollar reporting, while removing ASM International (ASMI) citing cycle weakness. Despite potential turbulence from rising tariffs in a disruptive scenario, Jefferies maintains that commodities remain structurally well-positioned and notes that many European sectors benefit from resilient local supply chains and lower exposure to dollar-linked costs.

Key Decisions for Investors

• Investors should consider increasing exposure to European equities, particularly large-cap, liquid stocks, in anticipation of a weakening U.S. dollar.
• Focus on European sectors identified as beneficiaries of dollar weakness, such as Airlines, Banks, Consumer, Mining, and Infrastructure, and note the positive outlook for AB InBev (BUD) due to emerging market tailwinds.
• Re-evaluate positions in companies like ASM International (ASMI) given concerns about cyclical weakness and its removal from Jefferies' recommended list.
• Monitor the trajectory of the U.S. dollar's decline and U.S. trade policy developments, as a disorderly devaluation or escalating tariffs could introduce significant global growth risks despite potential European outperformance.