Buying on Attention: Why European Defense Stocks are Soaring

Theme Attention

Author: Daniel Seiler

Date: April 20, 2024

Imagine we're a decade ahead. When we look back at the 2020s in the future, we'll probably recall a world rattled by conflicts and wars. It's not something anyone's happy about, but it's got people talking about defense a lot more. And when people talk, the stock market listens.

Given the attention on the defense industry, it is not surprising that the investment theme has slightly better performance than the broad market. Amidst the global financial landscape, defense stocks stand out like a knight in shining armor, having surged beyond the overall market by a handsome 10% just this year.

Interestingly enough, a closer look reveals a surprising fact: European defense substantially outperforms their US counterparts by a wide margin. It's like European defense companies just found a turbo button. But why the sudden surge of Europe's defense firms?

The figure below compares the year-to-date performance of an equal-weighted portfolio of European and US defense. The outperformance of European defense companies such as SAAB or Rheinmetall in 2024 is obvious. The US defense industry did not do that great. The US defense industry just performed slightly better than the MSCI World, and companies such as Northrop Grumman Corporation are even slightly negative.

It wasn't just a newfound investor realization of our troubled times. No, obviously not. It was Donald Trump catching once more the investor attention. The divergence started right at the time when Trump took out a page of his global-politics-playbook at the rally in Conway, South Carolina, in mid-February, “No, I would not protect you (Europe). In fact, I would encourage them (Russia) to do whatever the hell they want. You gotta pay!”

We've heard these warnings before, havent we? NATO countries need to pay up for defense, or they might find themselves on their own. This time, however, the message really stuck with investors since the reasoning is straightforward: If the U.S. steps back, Europe has to jump in. So what did investors do? They snapped up European defense stocks, betting on increased defense spending.

Now, with rumors about Trump's possible comeback, investors attention has only grown. It's the old market dance: buy on rumors, sell on news. And clearly, the mere thought of what could happen has investors act. Europe's defense scene is getting all the attention, and you can see that excitement reflected in the rising stock prices.