The global defense industry is churning right now. Following the security conference in Munich, where the USA hinted it would cease providing security help for Europe, many European governments are reassessing the situation.
Take Finland for example. It shares a border with Russia and fought a brutal war with the Soviet Union (the Winter War). It recently joined NATO and ordered F-35s from the US. But how safe is that? The manufacturer of weapons usually have a veto on where and how these are used as a condition of sale (to deter wars of aggression). But if Russia attacked Finland, could Trump veto Finland using the F-35s it purchased to defend itself? The suspicion is Yes, as Trump feels under obligation to Putin. This makes the F-35s worthless and a waste of money. Better to cancel the contract and buy cheaper Swedish Grippens.
Similar conversations are going on in the Baltic states and of course Germany. Defence stocks in Germany and western Europe are thus soaring in anticipation of a surge in new orders as Europe pivots away from American weapons. Here is the stock chart of Rheinmetall:
In the United States, the opposite is happening. Not only are US defence companies facing the problem of the Europeans buying less, there is the possibility of the US govt ordering less, as Defence Secretary Hegseth ordered his department to cut spending by 8% p.a. for the next five years.
Here is what happened to Lockheed Martin shared:
Nobody anticipated this development at the start of the year. Many portfolios are overweight US defence stocks and underweight European defence stocks. It's not too late to buy European defence shares. And if you are an ESG investor, you probably don't have any defence stocks at all - time to get out of ESG!