Forget AI. The big trade last year was to buy the idea that Europe has finally woken up to the need to spend big to defend itself.
But, after the best year ever for German defense stocks, investors now face the question of whether the trade is already over.
For those who haven’t been paying attention, start with the case for investing in defense. Fracturing geopolitics and concern about U.S. defense guarantees have combined with Russia’s assault on Ukraine to push European politicians, led by Germany, to commit to massive increases in military spending. The nationalistic shift and threats to supply chains have persuaded Europe to break with its traditional willingness to rely on foreign military suppliers, too.
And not just Europe. “There’s been a fundamental shift in priorities away from economic efficiency and globalization towards national security and resilience,” says Thomas Mucha, geopolitical strategist at Wellington Management.
Given all the extra money likely to come into defense companies, how could their stock prices not beat the market?
There are two risks: price and politics, where a lesson from the fall of the Berlin Wall should induce caution. Prices have soared, so a positive outlook for defense spending is already reflected in the jump in stocks.
But, after the best year ever for German defense stocks, investors now face the question of whether the trade is already over.
For those who haven’t been paying attention, start with the case for investing in defense. Fracturing geopolitics and concern about U.S. defense guarantees have combined with Russia’s assault on Ukraine to push European politicians, led by Germany, to commit to massive increases in military spending. The nationalistic shift and threats to supply chains have persuaded Europe to break with its traditional willingness to rely on foreign military suppliers, too.
And not just Europe. “There’s been a fundamental shift in priorities away from economic efficiency and globalization towards national security and resilience,” says Thomas Mucha, geopolitical strategist at Wellington Management.
Given all the extra money likely to come into defense companies, how could their stock prices not beat the market?
There are two risks: price and politics, where a lesson from the fall of the Berlin Wall should induce caution. Prices have soared, so a positive outlook for defense spending is already reflected in the jump in stocks.
