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Trades to Make Europe Great Again are gaining momentum

Trades to Make Europe Great Again are gaining momentum

Investors are recognizing that a more independent and less U.S. dependent Europe is emerging. These opportunities go beyond simply buying defence stocks.

There is good reason to be cautious, as the massive German expenditure on infrastructure and defence will not be felt for some time. Many are still playing the long-game.

Mark Dowding is the CIO of RBC's BlueBay Fixed Income team. He said that MAGA trades have now replaced MEGA trades. MAGA trades had lost their appeal. Mark was referring to President Donald Trump's Make America Great Again campaign.

DEFENCE FIRST

The German fiscal expansion and the Brussels plan to mobilize up to 800 billion euro ($866 billion) in rearmament means that defence stocks are still a fertile investment ground, even though they have risen since Russia invaded Ukraine 2022.

European aerospace and defense stocks are up 33% in the past year. The valuation multiples of these stocks now exceed those of their U.S. counterparts, reaching levels usually associated with high-tech or luxury goods.

This month, the tankmaker Rheinmetall briefly traded at a higher price than Ferrari, with a 44-fold multiple of its expected earnings. Investors are willing to pay more for this long-term trend.

Citi estimates that the average annual profit growth of defence companies is expected to range from 8% at BAE up to 32% at Rheinmetall by 2028.

It's not easy for the European Union to purchase more European weapons. Data from the European Commission shows that 78% of EU purchases have been made outside the EU since 2022. 63% went to the U.S.

Some caution after a large rally.

Markus Hansen, the Vontobel Fund Manager Markus Hansen believes that investors should concentrate on areas where there is a real and pressing need such as rebuilding depleted ammo stockpiles or infantry-related gear.

Defence supply chain companies and other sectors, including communications, could also benefit.

Eutelsat's stock has risen 260% in the last month on speculation that it could replace Elon Musk’s Starlink satellite to provide internet access to Ukraine.

Defence is not just about weapons. It's also about data, communication and logistics. Tomas Hildebrandt, portfolio manager at Evli, said that the value chain is a complex one where suppliers are important.

He said that examples could include the truckmaker Scania, Traton's Atlas Copco, which manufactures machinery for industrial and infrastructure projects, as well as construction companies.

Hey Bond

There will be more triple-A rated debts, whether they are joint EU bonds or German debt. This will help to maintain the status of the euro as a reserve currency.

The historic infrastructure and defense spending in Germany could amount to more than A

Additional debt of trillions of euros

Even the EU's supporters did not anticipate this move just a few months ago.

The SAFE bonds will add to the EU's debt of 650 billion euros.

This is a sign that the EU might be able to become a permanent borrower, as investors had long hoped. It would also mean it was ready to take on another challenge following its COVID-19 Recovery Fund.

However, the loans are only a small part of the 800-billion euro plan. The rest is left to the national governments.

3/ BINGING ON IT

The fiscal boost has brightened the economic outlook and European banks have surged by 26% in the first quarter of the year, their best since 2020.

Berenberg predicts that Germany's GDP will grow by roughly 1.4% between 2026 and 2027, after nearly four years of stagnation.

According to a March survey by BofA, the biggest sector overstretch in Europe is insurance and banks. Industrials are next.

Trevor Yates is a senior investment analyst at GlobalX and noted that the firm's DAX German stocks ETF has been receiving a lot of interest.

Investors expect European regulators to ease bank rules in light of the U.S. regulatory drive.

BlueBay Dowding stated that European bank capital bond were the firm's biggest overweight position in multi asset credit funds.

PERIPHERAL WINNS

Manish Kabra of Societe Generale's multi-asset strategist says that Spanish and Italian stocks are cheaper than those found in the core Europe. They could be poised to gain.

Southern European stocks also have a lower exposure to U.S. Tariffs than Germany and France, but they are heavily exposed to banks.

There are parallel developments. The German debt brake is one thing, but the MDAX (midcap) and the long euro are the other. "The two things that impact the banks are banking regulation and nominal GDP growth in Europe," Kabra explained.

The periphery provides exactly that.

5/ RENEWABLE

Analysts said that the push for Europe to become more independent in energy, starting 2022, will continue. Renewable energy and domestic power companies are expected to benefit.

The European Commission presented an Action Plan that aims to accelerate permits for renewable energy, change the way energy tariffs are calculated, and increase aid from state for cleaner industries and flexible power generation.

The German government plans to increase its spending by 100 billion euros, which will go towards climate and economic transformation.

Think tank Ember reports that solar generation will provide 11% of EU electricity in 2024 compared to 9.3% in 2030, and surpass coal.

Iberdola Endesa Enel, European utility companies have all rallied between 7-16% this year.

(source: Reuters)