A question has been running through Wall Street for months… how long will the AI push last? The fever that has generated in chip companies a demand unleashed by the revolution of this new technology is the main driver of Wall Street, with companies flying above the triple digits in the stock market so far in 2024. While this is happening in North America, a very similar process is taking over the old continent. The fever of the war industry does not stop and its companies continue to rise at a rapid pace.
The clearest example is the Norwegian Kongsberg Gruppen which, after shooting up 125% so far in 2024 It is already the second company in the entire Stoxx Europe 600 Index only behind Siemens Energy, which is recovering after its collapse due to the Gamesa crisis. The Nordic company is not the only military manufacturer that dominates the ‘Olympus’ of large European increases, Rheinmetall soars by 70%. There is also Rolls Royce, the aeronautical engineer and one of the largest defense contractors in the world, which is up 84%.
They are not the only examples as BAE System advances by 12%, Safran by 30% and Leonardo by 41%. In fact, the Europe Aerospace & Defense rises 28% this 2024. This is taking into account that many of the companies that make up the ETF are aerospace companies that are less exposed to the war industry, a sector that is facing a crisis in components that is weighing down its production. The clearest example is Airbus, which fell 1% for the year and has announced a cut in forecasts for the entire year due to delivery problems.
Even with this great burden, the sector has positioned itself as one of the big winners of the year. Since the war in Ukraine this index has shot up 194%. In fact, such have been their advances, some tripling their value from 2022 like Rheinmetall, that some analysts have shown great concern about a large bubble that is more common in technology than in an industrial sector. In the middle of the year, Goldman Sachs published a report in which it warned that the main firms in the sector “have a premium of 45% compared to the markets in general, which could indicate overvaluation.”
The North American firm, speaking exclusively of the European ones, has expressed that the largest companies such as Safran, Bae or Rheinmetall “they have a PER of 45 times “while the European industrial sector is at 22.” Therefore he believes that there is a risk of “a strong correction in the markets” perhaps too encouraged by the songs of war and geopolitical uncertainty around the world.
war fever
All this fever began with the war in Ukraine, when the main European countries began to skyrocket their military spending to rearm, seeing how a war was breaking out on their eastern front and the danger was more real than ever. Then events happened in the sector that went down in history as a plan to rearmament Germany, something that had not happened since the unification of the country. This year the EU’s spending on its armies has equaled that of China, already representing 1.5% of GDP. In Spain, for example, this year the budget for the military forces has increased by 20%.
In 2022 Germany created a special fund (outside the constitutional control of the deficit) of 100,000 million euros for an urgent military reform, but from Berlin they want this to be the first step to place spending at 2% of GDP from now on, as requested by NATO. The military organization estimates that only in 2024 there will be an 11% increase in the budget, that is, that the group of countries that make up the alliance (particularly the European ones) will spend close to 600,000 million extra.
European companies have been the big winners of this trend. The clearest example is Rheinmetall, whose orders have skyrocketed by 61% in the latest results presented. However, Norway’s Kongsberg is one of the big winners, announcing record orders last week particularly in its marine segment. The group achieved 20% more income generals and 30% more on their warships. However, what excited the market was rather its forecasts, anticipating that similar growth will continue during 2025.
“European governments need to spend more than €2 trillion to make up for 30 years of underspending”
That bright future is what Morgan Stanley experts point out in their report published a few weeks ago. Marie-Ange Riggio commented that they see the sector this year, despite the increases, weighed down by a technical factor. After the aggressive advances of 2023 many investors are reevaluating their portfolios and making profits. However, “despite a market repositioning, we believe the drivers remain fully intact.”
In fact, one of the arguments given by Morgan Stanley is that the sector is preparing for a new wave of orders. “In addition to replenishing the material donated to Ukraine and reducing its dependence on the United States, European governments need to spend more than 2 billion euros to make up for 30 years of underspending on defense.”
Mckinsey also believes that these values can expect a big boost, despite Goldman Sachs’ doubts. According to your estimates From now until 2028 there will be a total of defense spending of between 700,000 and 800,000 million of euros more. “Two years after the start of the war in Ukraine and 75 years after the creation of NATO, Europe is adapting to a new reality in terms of defense and security,” comments the consultancy.
Lindsey Berckman, an analyst at Deloitte, comments in a report published a couple of weeks ago that what we are seeing in the Middle East, the South China Sea and Russia itself does not raise doubts. “The tensions have continued and as a result the spending “The world’s defense spending exceeded $2.4 trillion in 2023. These trends are expected to continue up to and including 2025.”
The firm comments that “in 2025, the industry is expected to see a continued and increasing focus on several key areasincluding rocket technology, unmanned systems and space capabilities.” In that sense, he believes that during these years the spending structure that will reign in the industry is being built, with drones at the forefront but also in engines.
Although without a doubt the key for companies will be in how they solve problems in the complicated supply chain of the aerospace sector. While everyone assumes a sustained increase in orders, this can define profitability. “The supply chain is really complex, an average company of aerospace original equipment has 200 suppliers level 1 and 12,000 level 2 or 3 suppliers”, comments from Deloitte. Now the key is in the parts and components that are having delays “in a shortage situation where supply concerns are hitting the industry.”
Trump and the benefit of a ‘green’ rearmament
But returning to the ‘golden stage’ of a nascent war industry. There are two fronts that are stirring up the sector’s hopes even more. First, there is the rise of Donald Trump, which will generate an even greater need to feed the European war machine with local companies (given tariffs and trade distrust). However, the Republican’s decisive factor will be his demands on allies in increasing its military spending up to 2%.
In fact, Trump at the beginning of the year commented that he would take a radical decision to force his European partners to pay. “You don’t pay? Are you a defaulter?… well, it wouldn’t protect you, in fact it would encourage the Russians to do whatever they wanted. You have to pay”Trump commented at a rally in Conway, South Carolina. “A Trump presidency would have repercussions on a global scale; in the current volatile geopolitical environment and following Trump’s recent comments on NATO, the risk of increased fiscal spending should extend to European countries,” comment Federated Hermes experts.
But there is another factor that is elevating some European ‘weapons’ companies over others.. The ‘green’ impulse particularly in the maritime segment. This is one of the big secrets that is driving Kongsberg Gruppen. The Norwegian company has expressed in its latest results presentation that this is the reason for its great growth.
“At the same time, the maritime and ocean space industry is undergoing a transition to net zero, which involves zero-emission energy sources and more efficient use of energy“, commented the CEO of the firm, Geir Haoy, asked by the analysts after their results. “The offshore fleet in general is aging and, to ensure that these operations are carried out in line with regulation and efficiency objectives, more new assets in the future. Currently, the shipyards’ order book in relation to the total fleet is at a historically low level and, together with the daily rates in this segment, is a solid indicator of a future contraction” stated the senior official.
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