Citi: European Stocks in Steel, Autos Poised to Benefit From Trade Protection

A shift toward greater trade protectionism and strategic investment in Europe is creating opportunities for a select group of companies, according to a new analysis from Citi. The bank argues that the market has not fully priced in the impact of Europe's policy response to U.S. trade barriers and Chinese industrial competition.

Key Beneficiaries Identified

Citi analysts believe Europe's policy response is "further advanced than markets appreciate," citing emerging measures like procurement preferences, local-content requirements, and stronger trade defenses for strategic industries. The report highlights that this trend could benefit select steel, chemicals, industrials, and automotive stocks, while a related investment cycle could support companies in defense, utilities, and technology.

According to the bank, the sectors and companies best positioned to gain include:

• Direct Protection: Steel is cited as offering the "clearest evidence that credible protection can improve earnings and valuation." Autos and chemicals are also noted for having significant policy optionality. Key names mentioned are ArcelorMittal, Volkswagen, Renault, Lanxess, and BASF.
• Strategic Resilience: Increased spending on European autonomy is expected to support defense, industrials, utilities, and technology firms. Stocks flagged in this area include Leonardo, Rheinmetall, Thales, Vestas, Schneider Electric, EDP, Orsted, TotalEnergies, ASML, BE Semiconductor, and ASM International.

Market Valuations Yet to Catch Up

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To track these themes, Citi introduced a "European Autonomy Basket" of approximately 20 relevant stocks. The analysis points out that this basket has underperformed the broader European market by about 10% since the beginning of the Middle East conflict.

Despite this underperformance, the basket trades at a price-to-earnings ratio broadly in line with the market, even though its projected long-term earnings growth is about 7 percentage points higher. Citi's equity strategists argue these policy shifts are "not yet fully reflected" in valuations and see potential for a long-term market re-rating of about 10%, which would lift the average price-to-earnings multiple to roughly 16.

Economic Pressures Driving Policy

The push for protectionism is part of a broader "inward turn" for the European economy, which is increasingly looking to domestic demand and investment, rather than exports, to drive growth, according to Citi's economics team.

The report highlights structural pressures compelling policy action. These include a widening EU-China trade deficit, which the bank noted reached about €98 billion in the first quarter of a recent year, up from €65 billion two years prior. Falling industrial capacity utilization, particularly in Germany’s chemical and automotive sectors, was also cited as a key factor building the case for stronger domestic support.