European Defense Stocks See Worst Day in About 18 Months

Yeah. So we saw it as you say you know the biggest sell off in defense stocks in almost a year and a half and names that have really only moved in One Direction for the last two years since the invasion of Ukraine. So that’s Saab, Leonardo, Ryan Mittal all basically in the red and actually they were the biggest losers on the stock 600 yesterday. A lot of this was traced back to that Goldman note that you’re mentioning that really they’re flagging these issues on multiples that are a little bit higher what they were pointing to his price of earnings that are about a 45% premium to his to the Sox 600 versus historically when it’s usually at a 7% discount, right. And so when also when thinking about these stocks. So it’s important to put it all into sort of context. Yes, it’s a big sell off, you know, almost 10% off of Saab yesterday. We’ve got to put this into context, right. And so we have to pick our superlatives pretty carefully here because there are so many of them. But since the invasion of Ukraine, you know Ryan Matal is up almost 450%. It is 1/3 best performer on the MSCI World Index and it carries the same PE ratio, actually just above Apple. And these are all things I would have thought completely unthinkable a couple years ago. But that’s really what happens when you have these Black Swan events, and it really is such a paradigm shift as you do in European defense and how Europe is thinking about its own defense and spending money on it. Yeah, we were just talking about the UK Foreign Secretary David Cameron going over to the US trying to lobby Donald Trump to keep that aid going to Ukraine if he becomes the president. So you would think that there’s going to be funding to keep the war going and fund spending on defense. But what only does the path look like ahead for these companies? Yeah. So, Lizzie, for investors, I think it’s really trying to weigh up those two sides, the structural tailwinds and the possible headwinds. So the structural tailwinds are some of the things that you’re talking about there, right? Europe needs to get to its 2% spend on NATO. There is the question of if Trump was elected president of the United States, what does it mean? Would the US pull back and would that mean even more spending on defense, maybe closer to 4%? That’s what it was during the Cold War. And we had a story out yesterday from Bloomberg Economics that crunched the numbers. If to the G7 were to try to go to 4% of GDP spent on defense, that would mean $10 trillion over the next 10 years. So that would be absolutely mammoth. And we’re also still at the very beginning of the European rearming strategy, a rearming strategy that involves spending that money not just on defense but on European defense, which is why these stocks have done so well. So what the market is trying to do and investors are trying to say is yes, we have all these tailwinds, but how durable are there and what are the threats? The threats are? You know what? Where does this money going to come from? Right. You can only have money come in so many ways. You have to raise taxes. You have to either raise debt, you need to cut spending elsewhere or you need to grow. You know, growth is not necessarily the strong suit for Europe historically and you’re not really going to get there. Where you need to get on defense taxes is raising taxes. That’s not terribly popular. And getting cuts to the other parts of the the government, very complicated as we learned with the German budget crisis and debt, there isn’t that much fiscal headroom for a number of the countries within Europe. So all of these things are the questions that investors are weighing right now. But I think it’s fair to say when you have something so big a paradigm shift, yes, investors taking a little bit of money off of the table, but I don’t think we’re probably quite at the final pricing on this Lizzie.