I continue to search for companies and stocks that are insulated from US-China-related trade tensions or stand to benefit from re-shoring and changing geo-economic trends and events. That means businesses in niche markets with strong positions in under-the-radar sectors. Check out the Stoxx Europe Aerospace & Defense ETF (EUAD), suggests Carl Delfeld, editor of Cabot Explorer.
The 32-member NATO alliance is in the headlines primarily due to cost-sharing pressures related to supporting Ukraine, but the issue goes way back. US Senator Bill Roth, whom I worked with on the US Joint Economic Committee as president of NATO’s parliament, the North Atlantic Assembly, made the following comment to the US Senate Committee on Foreign Relations:
“Somehow an understanding must be made clear that the United States did not create the NATO alliance and prepare for war and send our troops to fight and die in Europe and spend our country into debt for 50 years simply to defend European real estate or European economic interests. Our commitment was first and foremost to the defense of democracy and the preservation of human liberty and it must remain so.”
Momentum is now clearly shifting to Europe being more responsible for its defense – and this means European defense companies and stocks are on the upswing. The law of unintended consequences means the repercussions of this trend won’t all be positive for America.
Europeans will demand more control over NATO. US defense company sales to European countries will decline. If this is not handled well, America will lose influence, jobs, and security. Europe is also going to be a formidable military competitor and exporter, especially to Asia and the Middle East.
However, investors can benefit from allocating some capital to this sector and the best way is via a shotgun approach with EUAD. This ETF tracks an index of top defense contractors, including Leonardo DRS Inc. (DRS), Rheinmetall AG (RNMBY), and BAE Systems Plc (BAESY), and was recently up roughly 24% this year, while the S&P 500 Index (SPX) was down.
In March, the European Commission released a proposal to step up defense spending by about $840 billion, including $165 billion in loans. The European Investment Bank also announced a big increase in funding for security projects and military equipment.
Most of the major weapons producers in Europe are partially state-owned, and each government has its own priorities, regulations, and defense strategies. Coordination with the Pentagon will be important.
Recommended Action: Buy EUAD.
