Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Defense Stocks Are Outperforming
Transcript
- Lucas: So the eurozone economy is grinding through a drought, growth is slowing, but there's one sector that just keeps climbing — defense. European defense ETFs are up nearly two percent this week, and that's not just noise. Luna: That's a big move for a sector, especially when the broader market is kind of flat. What's driving it? Lucas: Well, it's a combination of things, but the core is government spending. Since the invasion of Ukraine, European governments have committed to boosting defense budgets, and we're starting to see that translate into actual orders. Rheinmetall, for example, has seen its stock more than triple since early 2022. Luna: Triple? That's insane. And it's not just them, right? BAE Systems is up there too. Lucas: Exactly. BAE Systems, which is uk based but a major player in European defense, has been on a tear as well. The point is, this isn't just a short-term spike. There's a structural shift happening — governments are making long-term commitments to rearm, and that's creating a stable revenue stream for these companies. Luna: But is this sustainable? I mean, defense budgets can be politically sensitive. What if a new government comes in and cuts spending? Lucas: That's the big question. And it's not a given. But look at the political landscape — there's broad consensus across the EU and NATO members that defense needs to be a priority. Even countries like Germany, which historically underinvested in its military, have announced significant increases. The German government committed a hundred billion euros to modernize its armed forces, and that's just the start. Luna: So it's a political consensus, not just a temporary reaction. That gives it more staying power. Lucas: Right. And there's another angle — the supply side. These companies have backlogs that stretch for years. Rheinmetall's order book is full, and they're expanding production capacity. So even if new orders slow down, they have revenue locked in. Luna: That's a great point. It's not just about new money coming in; it's about the money already committed. Lucas: Exactly. And that's why the market is rewarding these stocks. They're not just growth stories; they're stable, long-term bets on geopolitical reality. Luna: So what does this mean for the average European investor? Should they be looking at defense stocks? Lucas: Well, I think it's worth paying attention to. But as with any sector, it's not a one-size-fits-all. You have to look at the individual companies. Some are more exposed to international markets, others to domestic. And there's always the risk that geopolitical tensions ease, which could hit the sector hard. Luna: But the trend seems pretty clear. Is there any downside risk you're watching? Lucas: The main risk is a sudden shift in government policy. If a major country like France or Germany elects a government that's less hawkish on defense, that could cause a correction. Also, there's the possibility of margin compression if costs rise faster than expected. But overall, the fundamentals look strong. Luna: And what about the broader European market? Is defense becoming a bigger part of the index? Lucas: It's definitely growing. Defense stocks are now a significant portion of some European indexes, and that's changing the composition. Investors who want exposure to European equities are getting more defense exposure than they might realize. Luna: That's a good thing to know. So, when we look at the data, the VGK is up 1.8% this week. How much of that is defense? Lucas: It's hard to say exactly, but defense has been a big contributor. The sector has been outperforming, so it's definitely adding to the gains. But it's not the whole story — you've got other sectors like industrials and tech also doing well. Luna: So it's a diversified rally, not just a one-sector show. Lucas: Exactly. And that's healthier. If defense was the only thing holding up the market, I'd be more worried. Luna: But let's bring it back to the average listener. If someone wants to invest in defense, what should they look at? Lucas: They have options. There are ETFs that focus specifically on defense, like the iShares European Defense ETF, or they can pick individual stocks like Rheinmetall, BAE, or Thales. But they should do their homework on each company's exposure and valuation. Luna: And maybe think about the ethical implications too, since some investors might have qualms about defense. Lucas: That's a valid point. For some people, investing in defense is a moral line. It's important to be aware of that and make your own choice. Luna: What about the broader economic picture? We've got a drought, slow growth, and the euro is flat. How does defense fit into that? Lucas: Well, defense spending is actually a countercyclical force. When the economy is slowing, government spending can help support demand. And defense is a big chunk of that spending. So it's not just about the companies — it's about the macro impact. Luna: That's a good point. So defense is kind of a stabilizer for the European economy right now. Lucas: It's one of them, yeah. And that's why I think this rally has legs. It's not just about the stocks; it's about the real economy. Luna: And if you've been enjoying these conversations, you might want to consider supporting the show. A couple of dollars a month at buy me a coffee dot com slash fexingo genuinely keeps us ad-free and going. No pressure, just if it's added value to you. Lucas: Yeah, we really appreciate it. It makes a real difference to us, honestly. But back to defense — one thing I want to touch on is the international dimension. European defense companies are also exporting, and that's a big part of their growth. Luna: Right, like to the Middle East or Asia. That diversifies their revenue streams. Lucas: Exactly. And it also creates a geopolitical angle — European defense exports are a tool of foreign policy. But that comes with risks too, like export controls or reputational issues. Luna: So it's a complex picture. But the bottom line is that defense is a sector to watch in Europe. Lucas: Absolutely. And with the current geopolitical climate, it's not going away anytime soon. I'd say for anyone interested in European markets, understanding defense is essential. Luna: Well, you've made a strong case. I'm definitely going to keep an eye on it. Lucas: Glad to hear it. And remember, always do your own research before investing. But the fundamentals here are solid. Luna: Thanks for breaking it down, Lucas. Lucas: Anytime. We'll be back with more insights on the European economy.