Good morning and happy Friday.
As Lenin put it, “There are decades where nothing happens, and there are weeks where decades happen.” Under that philosophy, this has been at least a six-decade week.
The S&P 500 fell another 1.4% on Thursday, which means it has officially tumbled into correction territory as investors remain hostile to the White House’s trade war and worry about global turmoil. Speaking of global turmoil: Vladimir Putin laid out numerous conditions Thursday for supporting the US-backed proposal of a 30-day ceasefire in Ukraine, indicating that Russia is unwilling to back off its maximalist demands amid fraught negotiations.
And speaking of fraught negotiations: The US government might shut down tonight, unless Senate Democrats buckle on their opposition to a GOP-backed bill that would fund the government for another six months (though, as of Thursday night, Senate Minority Leader Chuck Schumer said he would vote to avoid a shutdown). So, see you next week – and goodness knows how many decades await us then.
Asset Managers Could Provide a Second Windfall for European Defense Firms
Not even AI startups can outgun Europe’s weapons-makers for investors.
The EU last week announced plans to allocate hundreds of billions of dollars (well, euros) to boost its defense amid the persistent threat of Russia, and defense stocks have been on the march ever since. On Thursday, news came through that suggested a second windfall may be in the offing for the sector.
A Change of Heart
The reason Europe is suddenly rushing to invest in rearmament can be explained in three words: Vladimir Vladimirovich Putin. The Russian president, who ordered a full-scale invasion of neighboring Ukraine in 2022, is on Europe’s doorstep. Couple that with the United States putting heavy pressure on the continent’s leaders, and especially NATO countries, to spend more on defense, and you have the European Commission’s announcement last week that it plans to mobilize about 800 billion euros ($860 billion) for defense spending, including up to 150 billion euros ($163 billion) of loans to EU member states.
Adding fuel to the firepower is Germany, where politicians in the bloc’s largest economy are debating a constitutional reform to exempt defensive spending above 1% of GDP from the country’s so-called debt brake, which limits the budget deficit to 0.35% of GDP. In other words, the government could spend hundreds of millions on defense without clashing with hardline fiscal rules.
These developments have already driven European aerospace and defense stocks like Germany’s Rheinmetall (up 70% in the last month), France’s Thales (up 45%), and Italy’s Leonardo (up 44%) through the roof. Now, a group of salivating asset managers who normally stay on the sidelines when it comes to defense investments are considering changing course:
- EU rules require “sustainable” funds to invest under a ‘Do No Significant Harm’ criteria, and some have considered defense to run afoul of that definition and avoided the sector altogether. But the largest asset manager on the continent, the UK’s Legal & General, told Reuters Thursday that it plans to expand its defense stock holdings, with its CIO adding “earnings growth of these sectors will go up and probably go up quite significantly.”
- Meanwhile, Switzerland’s UBS Asset Management and Germany’s Allianz Global Investors, two top 10 asset managers on the continent, told the news agency they are reviewing their exclusions under the EU’s sustainability policies (though the latter said the timing was a coincidence).
Car Converter: Rheinmetall’s CEO said Wednesday that his company could take over the facilities of struggling auto manufacturers to more quickly expand capacity. Auto giant Volkswagen, which is shutting down production at facilities in two German cities to save billions in costs every year and offset dwindling demand, said: “We are open to sensible subsequent utilization of the two sites.”