A question has been circulating on Wall Street for months: How long will the AI surge last? The fever that has generated demand among chip companies triggered by the revolution of this new technology is the main driver on Wall Street, with companies flying over the triple digits in the stock market so far in 2024. While this is happening in North America, a very similar process is gripping the old continent. War industry fever does not stop and its businesses continue to grow at a rapid pace.
The clearest example is that of the Norwegian group Kongsberg Gruppen which, after climbing 125% so far in 2024 It is already the second largest company in the entire Stoxx Europe 600 index, behind Siemens Energy, which is recovering after its collapse due to the Gamesa crisis. The Nordic company is not the only military manufacturer to dominate the “Olympus” of major European growth, Rheinmetall soars by 70%. There’s also Rolls Royce, the aeronautical engineer and one of the world’s largest defense contractors, which is up 84%.
These are not the only examples since BAE System grew by 12%, Safran by 30% and Leonardo by 41%. In fact, the Europe Aeronautics & Defense up 28% ce 2024. This taking into account that many of the companies that make up the ETF are aerospace companies less exposed to the war industry, a sector facing a component crisis that weighs on its production. The most prominent example is Airbus, which fell 1% for the year and announced a cut to its full-year guidance due to delivery issues.
Despite this heavy burden, the sector has positioned itself as one of the big winners of the year. Since the war in Ukraine, this index has increased by 194%. In fact, such has been their progress, some triple their value from 2022 like Rheinmetall, Some analysts have been very concerned about a significant bubble, more common in the technology sector than in the industrial sector. Midway through the year, Goldman Sachs released a report in which it warned that the sector’s leading companies “carry a 45% premium to broader markets, which could indicate overvaluation.”
The North American company, speaking exclusively about European companies, said that the largest companies like Safran, Bae or Rheinmetall “they have a PER of 45 times “while the European industrial sector is at 22.” He therefore believes that there is a risk of “a strong market correction”, perhaps too encouraged by war chants and geopolitical uncertainty across the world.
war fever
All this fever started with the war in Ukraine, when major European countries began to significantly increase their military spending to rearm, seeing that a war was breaking out on their eastern front and the danger was more real than ever. Then events occurred in this sector which went down in history as a project for the rearmament of Germany, which had not happened since the unification of the country. This year, EU military spending matched China’s, already representing 1.5% of GDP. In Spain, for example, this year the budget for the military forces increased by 20%.
In 2022, Germany created a special fund (apart from constitutional deficit control) of 100 billion euros for urgent military reform, but from Berlin they want this to be the first step to place spending at 2% of GDP now, as requested by NATO. The military organization estimates that only in 2024 the budget will increase by 11%, that is, the group of countries that make up the alliance (especially European countries) will spend almost 600 billion additional dollars.
European companies have been the big winners from this trend. The clearest example is that of Rheinmetall, whose orders increased by 61% in the latest results presented. But the Norwegian Kongsberg is one of the big winners, announcing record orders last week, particularly in its maritime segment. The group achieved 20% more revenue generals and 30% more on their warships. However, what has excited the market is rather its forecasts, anticipating similar growth during the year 2025.
“European governments must spend more than 2,000 billion euros to make up for 30 years of underspending”
This bright future is what Morgan Stanley experts underline 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 make a profit. However, “despite a repositioning of the market, we believe that the drivers remain fully intact”.
Indeed, one of the arguments put forward by Morgan Stanley is that the sector is preparing to a new wave of orders. “In addition to replenishing the equipment donated to Ukraine and reducing its dependence on the United States, European governments must spend more than 2 billion euros to compensate for 30 years of underspending on defense. »
Mckinsey also believes that these stocks can expect a strong increase, despite the doubts of Goldman Sachs. According to your estimates By 2028, total defense spending will be between 700,000 and 800,000 million. 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 cabinet.
Lindsey Berckman, an analyst at Deloitte, comments in a report published a few weeks ago that there is no doubt about what we are seeing in the Middle East, the South China Sea and Russia itself. “Tensions persisted and, as a result, spending for the world’s defense exceeded $2.4 trillion in 2023. These trends are expected to continue through 2025 (inclusive).”
The company comments that “by 2025, the industry is expected to see a continued and growing focus on several key areasincluding rocket technology, unmanned systems and space capabilities. “In this 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 the engines.
Although, without doubt, the key for companies will be how they solve problems in the complex aerospace supply chain. 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 Deloitte. Now the key lies in the parts and components which have delays “in a shortage situation where supply problems hit the industry”.
Trump and the benefits of “green” rearmament
But let’s return to the “golden stage” of a nascent war industry. Two fronts are further fueling the hopes of the sector. First, there is the rise of Donald Trump, which will create an even greater need to fuel the European war machine with local companies (given tariffs and trade distrust). But the decisive factor for the Republican will be his demands on his allies. by increasing its military spending by up to 2%.
In fact, Trump said earlier this year that he would take a drastic step to force his European partners to pay. “Aren’t you paying? Are you a defaulter?…well, that wouldn’t protect you, on the contrary, it would encourage the Russians to do what they want. You have to pay”Trump commented at a rally in Conway, South Carolina. “A Trump presidency would have global repercussions; in the current volatile geopolitical environment and following Trump’s recent comments on NATO, the risk of increased budgetary spending is likely to extend to European countries,” comment the experts at Federated Hermes.
But there is another factor that elevates some European arms companies above others.. The “green” impulse particularly in the maritime sector. This is one of the great secrets that drives Kongsberg Gruppen. The Norwegian company indicated in its latest results presentation that this is the reason for its strong growth.
“At the same time, the maritime and ocean space industry is experiencing a transition to net zero, which involves zero-emission energy sources and power sources. more efficient use of energy“, commented the company’s CEO, Geir Haoy, when interviewed by analysts after their results. “The offshore fleet in general is aging and, to ensure that these operations are carried out in accordance with regulatory and efficiency objectives, more new assets in the future. Currently, the shipyards’ order backlog relative to the total fleet is at an all-time low and, together with the day rates in this segment, is a strong indicator of future contraction,” the senior official said.
