Michael Field, CFA, Chief Equity Market Strategist EMEA at Morningstar, joins us to discuss European defence stocks and Morningstar’s recent report describing the sector as being in the “initial stage of a new supercycle”.
We start with whether the US midterm results change the outlook, given the situations in Ukraine and Iran. We then ask whether there is further to run after a roughly 250% rise in European defence stocks over five years, and whether the market has underestimated earnings growth.
Michael explains how he expects the supercycle to develop and the factors driving it. We look at munitions demand. We also discuss how far investors should discount NATO’s 5% spending pledge.
In the second half, we turn to companies and product categories, including munitions, naval and jets, and to valuation standouts in the report. We discuss several individual names and drill down into the factors driving the sector’s fair value.
Podcast key topics:
- The impact of the US midterms on defence forecasts, including Ukraine and Iran
- Whether there’s more upside after a roughly 250% five-year rally
- The “new supercycle” thesis and what its next stages could look like
- Risks that could end the cycle early: peace, fiscal constraints, or targets being met
- Munitions demand after the war and NATO stockpile requirements
- How credible NATO’s 5% target is for high-deficit countries
- Which product categories are driving outperformance
- Rheinmetall at 0.39 of fair value: an opportunity or a falling knife?
- BAE Systems at 0.72 of fair value compared with its continental peers
- Takeaways for defence investors